Earlier this month, a committee of representatives from several banks—led by the Punjab National Bank chairman Sunil Mehta—announced an alternative mechanism for resolving bad loans, called Project Sashakt. While the Insolvency and Bankruptcy Code, 2016, process has taken off to a flying start and provides a transparent and independent mechanism for resolving bad loans, the swelling load of bad loans and NPAs on the Indian banking system has seen no signs of abatement.
RBI, on February 12, 2018, had issued a circular mandating banks to start the resolution process under IBC for all large accounts that are overdue even by a single day, from September 1, 2018. Multiple issues may arise due to this deadline, including testing the capability of the already-overburdened National Company Law Tribunal (NCLT), and severe depletion of value considering several assets (especially power assets) have been in the market for some time and found no takers, and many will likely have to be wound up post IBC. While not specifically spelt out, it appears Sashakt seeks to stem some of these effects, while at the same time ensuring that NPAs are dealt with adequately.
A five-pronged approach
The Sashakt scheme proposes a five-pronged approach:
* Resolution of loans up to `50 crore by lenders within a period of 90 days;
* Resolution of loans between `50 crore and `500 crore within 180 days, with the lead lender taking charge;
* For assets up to `500 crore, an independent asset management company (AMC) would be created that will be funded by alternative investment funds (AIF);
* The NCLT/IBC process; and
* Setting up of a platform for trading assets.
As of July 23, 2018, reports suggest that several banks have entered into an inter-creditor agreement (ICA) as part of the Sashakt scheme in relation to loans above Rs 50 crore. The ICA permits the lead lender to formulate the resolution plan and all decisions are to be guided by majority lenders, i.e. those with 66% share in the aggregate exposure. If any lender dissents, the lead lender has the right but not the obligation to buy-out dissenting lenders at a value equal to 85% of the lower of liquidation value or resolution value.
The other key aspect of Sashakt is parking of stressed assets in an asset management company (AMC). Lenders are required to set up a new AMC (or use existing asset reconstruction companies like the Asset Reconstruction Company India Ltd) with alternative investment funds (AIFs) below. An AIF can raise funds from institutional investors, as well as banks, which it will use in investing in stressed assets acquired by AMCs, and AMCs will use these funds to issue security receipts to banks against bad loans that are to be redeemed within 60 days. This will be a market-driven process, considering that other AMCs/AIFs will be permitted to bid for these assets and match the national AMC/ARCIL’s price, which will be treated as the floor price.
Banks believe that the Sashakt approach will be a cleaner and quicker exit for them compared to IBC, which we have seen usually stretches beyond the mandated 270-day period. Under Sashakt, lenders will be able to transfer NPAs onto the books of the AMC immediately, and ARCs will have the opportunity to revive the asset, which is relevant for the power sector, considering the ministry of power’s recent push to revive stressed assets—for example, pilot schemes for power purchase and proposal of a national discom. Also, unlike in IBC, where lenders have to face questions relating to massive haircuts, the burden of price fixation is no longer on lenders, with price discovery being a welcome initiative.
While lenders have already taken the first step by signing the ICA, all other formalities required under the Sashakt scheme are pending, including either setting up a new AMC or funding an existing AMC to take up some of the NPAs. The September 1 deadline is fast approaching.
By Abhimanyu Ghosh, Associate Partner, Khaitan & Co