Lessons from resolution of Jet Airways – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/lessons-from-resolution-of-jet-airways/articleshow/83790052.cmsSynopsis

The company had received claims of nearly Rs 25,000 crore, of which the resolution professional admitted Rs 8,462 crore as legitimate claims. The financial creditors’ due was Rs 7,454 crore. They will, under the resolution plan approved by the National Company Law Tribunal (NCLT), get Rs 1,010 crore in five instalments, plus 9.5% equity in Jet’s new avatar.

The resolution of debt-riddenJet AirwaysNSE 4.98 % after two years of weathering uncertainty is welcome, and offers lessons for the future, particularly for how to handle failure to service debt on the part of entities like airlines, in which the bulk of the capital employed is debt.

The company had received claims of nearly Rs 25,000 crore, of which the resolution professional admitted Rs 8,462 crore as legitimate claims. The financial creditors’ due was Rs 7,454 crore. They will, under the resolution plan approved by the National Company Law Tribunal (NCLT), get Rs 1,010 crore in five instalments, plus 9.5% equity in Jet’s new avatar.

A consortium led by Dubai-based entrepreneur Murari Lal Jalan and Kalrock Capital would hold 89.79% stake, and employees would get a nominal 0.5% stake, in the airline. Two lessons can be drawn from this.

One, in the case of companies in which equity forms a small part of the capital employed, even a month’s delay in servicing debt should trigger foreclosure of the loan and conversion of the banks’ loans into equity and the creditors should take over the entity, and oust the incumbent management from control. Such covenants should be written into the loan agreements.

Two, it makes eminent sense for lenders to convert their debt into equity in defaulting companies, and take over control and appoint professionals of their choice to run the company, even in the case of normal companies. Getting the debt converted into equity in debt-ridden companies is a better option than banks taking steep haircuts of up to 90% in the resolution of bad loans.

Unlike loans, equity does not have to be serviced when the company does not make a profit. So, when the company turns around, the equity can be sold back to the company and banks can recoup their outlays. The resolution of Jet Airways also offers another lesson. It has taken way too long. This must change. The process must be completed in the maximum of 330 days provided for in the statute, including time for litigation. Delays must trim the resolution fees.

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