Insolvency Code — For Recovery Or Survival?

Shri R.M.Desai is retd GM, BOI and ED of IOB. He has been a Director of several companies, including that of Dena Bank. He is voracious reader and shares his thoughts on multifarious topics with unbelievable clarity. His sense of humour is exemplary.

Indian Institute Of Banking and Finance (IIBF), as a part of its 89 years of existence and celebration, had organised a Seminar on “The Role Of NCTL in Insolvency and Bankruptcy Code” and he was one of the speakers, comprising of RBI Regional Director, CGM.Corporate Finance,SBI and four practicing Company Secretaries.

The subject given to Shri Desai was Insolvency Code — For Recovery Or Survival?

He has shared his views, which he expressed in the seminar, to a select group of funds.

It will be useful to those who are interested in the topic.
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1. There is a serious and big mismatch between objectives and likely achievements which is projected .This is clear from the fact that as per industry’s own estimate, this measure will unlock approx.Rs.25000 Cr. over a period of 5 years as against estimated NPA of Rs. 14 Lakh.

2. As per Code,
(i) The adjudicating authority for insolvency is NCLT(National Company Law Tribunal).
(ii) Once NCLT gives a go ahead, maximum in 270 days,the management of the company will pass into the hands of interim Insolvency Professionals (IP) and after one month, IPs nominated by the promoters.
(iii) IPs will form a Committee of Creditors (COC).
(iv) COC will decide by a majority of 75% of votes in value terms, what course of action they want to pursue.

3. So the option of survival or recovery will be exercised by COC on their assessment as to what assets are available, their realisable value, whether at all there is any possibility of revival, given the position of Industry and economic forces then prevalent and cost benefit analysis.

4. The last option, of course, is to go for appointment of liquidator to complete the procedure in two years’ time.

5. But the most important thing is whether it will serve as a magic wand and transform dramatically the NPA scenario. NO. Why?

(1) Indian Corporate Sector is the the most leveraged in the world. (Amount in Rs. Crore).
Tata Steel – 83,804: Jindal – 44,140;
Essar Group – 133,000 ; Bhushan Steel – 42356
Bhushan Power – almost 44000; JSW – 35171.

King Fisher’s outstanding of Rs.9000 Cr. would look like peanut in comparison. There are others like Videocon, Alok Industries, Amtech of Vinod Dham, Lanko Industries etc.

(2). He elaborated on how Essar Group had brought ruin upon itself by breakneck expansion in varied highly capital intensive industries simultaneously, characterised by long gestation periods like Steel, Shipping, Telecommunications, Oil, Refinery, Essar Global, Essar Projects, etc. Even after sale of its oil business, debt at 50% of its original Rs.133,000 Cr (ie Rs. 66,500 Cr) continues to be nerve-wrecking. Essar had got close to 4.5 billion USD from sale of its stake in Hutchison. Where this money found way need a look. With this kind of unsustainable levels of debt,from where will the money for recovery come from?

(3) Given the overall picture of top 30 accounts,a haircut of at least 40 to 50 % is inevitable.

(4) Filing for bankruptcy or insolvency shows the desperation of lenders,almost a last resort of lenders,hoping against hope to make the most of a bad bargain.All such accounts had earlier gone through a string of restructuring exercises (at times flogging a dead horse) which naturally had failed.Insolvency proceedings can at the most give the industry a peaceful death. Euthenasia??

The above are the most stumbling blocks but look at the operational obstacles.

(A) Delaying tactics by industrialists –While they may not have the money to pay salaries or dues, they always find plenty of resources to engage most expensive lawyers to challenge NCLT judgements and delay the inevitable.

(B) Essar filed a petition against order for insolvency proceedings against them in Gujarat High Court. Fortunately it was dismissed.

(C) Supreme Court has granted a stay in favour of Jayprakash Associates.Such judicial interventions which cannot be denied nevertheless delay the overall proceedings and final outcome.

(D) Similar experiences have been seen in case of SARFAESI & DRT cases. In Delhi as ZM, he had observed that large number of cases had been decided, but the Hon.Judge had no time to dictate judgements and the bank could do nothing about it.

(E) The promoters refuse to cooperate in operational matters after the Order and although there are provisions in Code to punish them with fine and sentence extending upto five years,Tribunal is a slow mover in the matter So, success of vested interests in dragging the matters legally slows down the whole process.

(F) All BIFR cases are transferred to TRIBUNAL. All pending insolvency cases too are now transferred to them. In addition, it has to attend to many other matters,like complaints,minority interests,disputes. In other words, NCLT is burdened with so many other matters.

(G) Like CBI,High Courts,Supreme Court and Police, the Tribunal too needs to be adequately staffed for being really effective in its allocated tasks.But govt, as we all know, works at its own sweet pace.

(H) Dearth of Insolvent Professionals in terms of number and expertise required. Right now, it is the CAs, who are more acquainted with taxation, consultancy, audit etc., who are carrying the burden.The gap between requirement and availability is likely to take lot of time to bridge.

(I) Wide variety of industries going for insolvency will be difficult to handle by IPs, as they all have different industrial activities, different issues and problems and management structures. In other words,IPs will have to appoint various experts to make the scheme work.

To conclude:

= The Code has come at least 50 years late. We had Chapter 7 and 11 in US for pretty long time.

= Given the current situation, the Code can only result in orderly and timely liquidation of sinking companies and release of funds to the extent possible.

= It cannot help industry in substantial recovery in large accounts, which are sitting on mountains of borrowings.

= The current situation is brought about by ambitious but what can be better described as mindless or adventurous diversification by our industrialists – a common pattern observed in top 30 top NPAs.

= Prevention is better than cure.Time to go back to drawing tables and review risk management and credit assessment techniques Time too to introspect banks have gone wrong. Were the banks led the garden path by big names of Corporate Sector and (mis) guided by an illusion that like king, they too can do no wrong?

= Prima facie Bankers appear to have made a cardinal sin of being mesmerised by big names.

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Lot to think about.

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