The world’s largest economy, the US, has seen a decline in bankruptcy momentum in the last decade. From 300 bankruptcy filings (with debt of $4,09,534 million) in the 2008/09 period, subsequent to the global financial meltdown, the number of filings came down to 70 (debt of $1,06,929 million) in 2017. Its current Bankruptcy Act, which came in into effect in the late ’70s, has seen numerous amendments to make it more relevant to the present times. But, back home, the year-old Bankruptcy Act has been creating a flutter.
The Reserve Bank of India (RBI) has already scrapped all the earlier restructuring schemes, sending a message to banks to straightaway take the bankruptcy route for distressed companies. The government has amended the Act twice already within a year of its operations to plug loopholes and has also set up a committee to make substantial changes in the Act. After directing 40 odd companies to bankruptcy court, the RBI issued a new directive to banks recently to refer distressed companies with loan amount under default over `2,000 crore to bankruptcy. Experts warn that the RBI is moving too fast, too soon in the hope of a speedy resolution. There also exist constraints in the form of higher provisioning for banks, limited capital, lack of bidders and also the limited capacity of the National Company Law Tribunal (NCLT), the adjudicating authority, to dispose of cases within 180 days.
If a large number of companies go into liquidation, there will be a huge loss in terms of productive assets, entrepreneurship and also loss of employment. It’s a double whammy for banks who are already burdened with deteriorating asset quality, lower credit offtake and higher provisioning. In the books, banks are required to make a much higher, 50 per cent, provisioning from profits for bankruptcy cases. The 12 large cases identified by the RBI alone had an outstanding debt of around `2 lakh crore. “There are estimates that an additional `2 lakh crore of debt cases would hit the NCLT in the next six months. There will be huge provisioning requirements, resulting in further losses for banks. The decision of taking a distress case to bankruptcy should be left to us,” pleads a banker.
Financial creditors, especially banks, are not very aggressive in approaching NCLT for resolution anyway. In fact, the law is currently used aggressively by operational creditors. Banks are keener on exploring options such as invoking guarantees or providing leeway to promoters to pay up the dues by selling off assets or borrowing from NBFCs and other sources. There is also an ARC (Asset Reconstruction Company) route available to banks to dispose of a bad loan.
The last one year has been full of learning for banks. For example: the bidding is not very encouraging for distressed assets; bankers are not getting the enterprise value. In most cases, the price offered by strategic players is around 40-60 paise to a rupee in terms of value of assets. Evidently, banks will not make much money considering the original principal outstanding amount. Besides, there is no template for selection of the best bid. “We don’t know which parameter to give the highest score while voting for a bid at the committee of creditors. The background of bidders (strategic, fund house, domestic or global), multiple partners making a bid, upfront cash, cash over a period of time, equity infusion and equity stake to banks are some of the parameters considered,” says a public sector bank official.
“The success of IBC (Insolvency and Bankruptcy Code) now depends on an innovative and proactive business-like approach by banks on a case-by-case basis, in working out a restructuring package,” says Nitin Potdar, M&A Partner at J. Sagar & Associates. He adds that wherever required, the NCLT bench may take help from external professionals to work out solutions. “We need a few good examples of success,” he states.
Cases are already piling up at the NCLT – which also hears cases under the Companies Act related to mismanagement and disputes. Under the new Act, more than 552 cases have been referred to the NCLT in the last one year.
Operational creditors, notorious for taking companies to the NCLT for the slightest default, have bombarded the adjudicating authority with bankruptcy cases – 50 per cent of the cases filed at the NCLT are by operational creditors. NCLT, meanwhile, has a limited capacity; there are only 10 NCLT benches. And places like Delhi and Mumbai have only one each.
Several questions arise. Is it prudent to push more companies to NCLT when amendments are still taking place? In fact, the government has recently set up a committee to review the IBC functioning, which, many believe, would only add to the confusion. There is also a dearth of high-quality resolution professionals. Ones who can successfully manage a company during bankruptcy, devise a restructuring package or take the company into liquidation are few and far between. In many cases, requests have been made for extension of time beyond 180 days. In case of no resolution, the liquidation would create further damage.
There is also an issue of capital for buyouts or interest from domestic and global buyers to acquire a distressed company. Barring a few large industrial houses like Tata, Reliance, Aditya Birla, JSW and Godrej, the financial standing of many of the companies is not very solid. Most of them are grappling with low capacity utilisation, higher debt, and slowdown in the economy. Foreign fund houses, too, are cautious. The recent amendments are deterring those who were in the process of setting shop in India. The ones bidding now are very clear that they won’t bid aggressively. In many of the smaller cases, the possibility of promoters making a comeback via friends and relatives is very high.
via Acting in Haste- Business News