Satish Kumar Gupta, resolution professional of Essar Steel- the largest account under IBC, in an interview with Shilpy Sinha shares his experience of resolution of Essar SteelNSE 0.00 %, views on applicability of IBC to financial service providers, group insolvency, progress of stressed assets resolution and strengthening of IBC.
Essar is one of the first 12 cases referred by the RBI under IBC. What is the impact of resolution of Essar Steel?
The resolution of Essar Steel with realisation of more than Rs 42,000 crore has significant impact on financial ecosystem. With availability of funds and committed additional infusion of Rs 8,000 crore by ArcelorMittal, Essar Steel’s under-utilised productive asset can now operate at its optimal level of production and enhance capacity utilisation. As an auxiliary impact, various companies engaged in power, ports services etc. providing services to Essar Steel with outstanding of at least a few thousand crores, could also meet their obligations to banks and their account classification has moved from SMA to standard category in the banking system on account of timely and increased payment due to higher capacity utilisation by Essar Steel, thereby further reducing banking system’s stressed assets.
Resolution Plan submitted by ArcelorMittal for Odisha Slurry Pipeline Infrastructure Limited, a critical disputed asset for Essar Steel, has also been approved by its CoC which would entail additional realisation of about Rs 2,300 crore for its lenders.
With ArcelorMittal and Nippon Steel as sponsors, Essar Steel will undertake capex for completion of incomplete projects as also expand the capacity and invest in projects for cost competitiveness. ArcelorMittal has also shown interest in bidding for mining assets being auctioned by the Government for its securing raw material linkages.
Resolution of Essar Steel has multiplier effect on the financial eco-system, many times the realised amounts by its creditors.
Recently the government has extended the applicability of the IBC to Financial Service Providers (FSPs). How will the resolution of FSPs be different from that of an industrial entity?
Introduction of FSP rules is a timely step for the resolution of financial firms facing debt servicing and solvency issues. During resolution process, FSP shall be run as a going concern to inter alia ensure that FSP’s critical functions, its business and its provisions of services to consumers continue. FSP’s resolution process can be complex as its diverse set of creditors may be governed by different financial regulators. Challenges in resolution process of FSP are likely to be different from than faced in other entities.
Financial services company face unique challenges as compared with industrial entities as funds, which is raw material for a financial services business, is not available. Even with available funds, it may be difficult for FSP to continue its normal lending business until its earlier underwriting standards and monitoring processes are overhauled. In the interim period, CIRP, FSP will continue to recover/collect its dues by regular collection, settlement or recovery proceedings its dues and largely invest in risk-free low yield securities. An industrial unit’s working capital cycle is normally of shorter period, whereas for a financial service provider, transaction life cycle is of much longer maturity, which can be more than resolution period. So, resolution period of a financial service provider should be shorter as compared to that of industrial entity as value could go down quickly.
The Committee of Creditors(CoC) and its commercial wisdom is most important as held by the Supreme Court order. Does it bring down?
The Supreme Court has been emphasising the primacy of the CoC which is one of the key facets of the IBC. In Essar Steel judgment of November 15, 2019, the Supreme Court has re-emphasized the primacy of the commercial wisdom of the CoC in relation to resolution of the corporate debtor as was held in its earlier decisions in K. Sashidhar vs IOB wherein it held that Adjudicating Authority have limited scope to suggest or recommend but can’t make judicial review of CoC’s commercial decision. In Swiss Ribbon case, it was held that financial creditors have higher pecking order. While the commercial wisdom has been recognised, it has also been specified that the CoC does not act in any fiduciary capacity to any group of creditors, rather it is to take a business decision by the requisite majority, which will be binding on all the stakeholders of the corporate debtor.
CoC plays significant role in value maximisation of the corporate debtor. In Essar Steel, SBI and other banks’ continued to support the operations of the company, and CoC exercised its ‘creditors-in-control’ regime with commercial considerations to maximise value of Essar Steel.
How do you see resolution of stressed assets progressing under RBI’s June 7 circular?
RBI circular dated June 7, 2019 provides for early recognition of default and enables lenders to implement restructuring under which a potential resolution plan can be negotiated and agreed between the financial creditors and promoters of the corporate debtor as per the commercial and economic judgment of creditors and same can be implemented through suitable arrangements including under Section 230-233 of the Companies Act, 2013. Resolution through Inter- creditor agreement framework provides flexibility in restructuring and has gained traction though slowly has been implemented successfully in a few accounts recently. At the end, it will be lenders’ commercial call whether to continue efforts for restructuring or take these cases subsequently to insolvency.
Insolvency process for personal guarantors to corporate debtors have already been notified in November 2019 and cross border insolvency amendment would also be taken up in due course of time. Above measures will strengthen IBC resolution framework significantly. Filing of insolvency against personal guarantors will increase number of cases pending in NCLT. Completion of resolution of the first list of twelve cases referred to insolvency under IBC in June 2017 by the Reserve Bank of India will provide major morale boost to insolvency regime and therefore these accounts may be resolved on priority in a focused manner and releasing bandwidth for all concerned to focus on other cases.
How can cost and time period for Corporate Insolvency Resolution Period be reduced?
The judicial interpretation of the Code over the last few years has brought clarity on various issues and infused positive behavioural change as required in various stakeholders thereby easing its implementation.
One of the major reason of delays in resolution was on account of litigations by creditors with regard to inter se distribution amongst creditors which has also been resolved with Essar Steel judgement and IBC Amendment 2019. Major creditors have also realised that any potential increase in realisation due to protracted litigation may also get offset by lower time value of realisation. An insolvency professional requires support of many professionals from different fields, who assist him in cash management services, day-to-day operations, claim verification, litigations, etc. These professionals will be able to respond quicker if they possess multi-disciplinary skills of finance, banking, commercial and law.
With first batch of Graduate Insolvency Programme initiated by IBBI, it is expected that these professionals with focus on insolvency and bankruptcy skills and dedicated services to IPs will form backbone to IP support system and reduce time and cost of insolvency proceedings significantly.