Do not go gentle into that good night, wrote Welsh poet Dylan Thomas some 70 years ago. That’s a message that many Indian promoters of companies seem to have taken to heart. Despite being smothered by distressed assets, promoters are not throwing in the towel just yet. Through fair means or foul, by which we mean litigation or random allegations, they seem determined to hold on to their crumbling empires.

The ones bearing the brunt of this inability to let go are, predictably, employees and lenders. Banks have reported a steady rise in the number of non-performing assets on their loan books. These are loans to companies that seem unable to pay back. In just the past two years, there has been a surfeit of such ‘assets’: Binani Cement with debts of Rs 3,976 crore; Essar Steel, now bankrupt with debts of Rs 37,284 crore; and Bhushan Steel with borrowings of over Rs 44,000 crore.

A succession of such insolvent companies meant that banks found their bad loans, or non-performing assets (NPA), steadily mounting. As on June 2017, NPAs stood at Rs 7,33,137 crore, according to finance ministry data.

This isn’t a new problem by any stretch. It’s been going on for decades, with successive governments trying piecemeal reforms and creating a patchwork of legislation. Enter the new government, led by the Bharatiya Janata Party (BJP). Within two years of sweeping to power, the government introduced the Insolvency and Bankruptcy Code (IBC) in 2016. The idea behind this code was to put an end to Sisyphean legal exercises by promoters. In effect, the new law gave stakeholders two options: put in place an approved resolution plan, or liquidate the company. Either way, lenders would get back at least a fraction of their money. At the same time, the National Company Law Tribunal (NCLT) was set up. The NCLT was set up more than 15 years after the Justice V. Balakrishna Eradi Committee submitted its report on the insolvency laws in India.

At the time, the committee had recommended setting up a National Tribunal to replace various entities including the Board for Industrial and Financial Reconstruction (BIFR). The idea was to streamline the resolution process for insolvent companies. Bureaucratic and political delays meant that the NCLT was set up only in 2016, along with the National Company Law Appellate Tribunal (NCLAT)—the court of appeal for NCLT cases.

When it was launched, the IBC was greeted with acclaim. It is perhaps “the boldest attempt to fix the system”, says Aditya Mittal, president and group chief financial officer (CFO), ArcelorMittal. The code “provides India with a selfcorrecting marketplace for the secure and transparent disposal of distressed assets”, he adds. Puneet Dalmia, managing director, Dalmia Bharat Group, agrees, saying the code is “the biggest reform story in India’s capitalist history”.

These are powerful voices from India Inc. You’d think these would be the ones against the idea of the IBC since it’s so clearly about putting promoters in their place. That corporate India is in favour of the code says much.

Except, of course, it hasn’t been as perfect. Promoters soon found a loophole that they used to devastating effect. They simply bid for their own bankrupt company at substantially discounted rates, which meant that they kept their company while the lenders had to bear the loss; in the jargon of the financial world, lenders had to take a haircut. In effect, then, the IBC became a mechanism for promoters to keep their assets.

Banks, meanwhile, continued to suffer. In a bid to close this loophole, the government announced an amendment to the IBC in 2017, and introduced the significant Section 29A. This amendment attempts to define who can bid for a company and suggest a resolution, and clearly states that existing promoters cannot participate in the process.

It’s been barely six months since the amendment was introduced, and corporate India seems up in arms over it. Pretty much everyone we’ve spoken to wants the amendment changed. “A default can be for various reasons—business failure, fraud or wilful default. Is it right to club all of these in the same bucket? Why should a promoter who has defaulted because of business failure not be allowed to bid for his company?” asks Amit Tandon, founder and managing director, Institutional Investor Advisory Services.

Somewhat ironically, Mittal seems happy to have the IBC in the shape it is. Ironic, given that his company has challenged the decision of the resolution professional and the lenders in the case of Essar Steel; ArcelorMittal had bid for Essar but the bid was rejected under Section 29A. ArcelorMittal has challenged this decision and has approached the NCLT for redress. Meanwhile, Mittal says: “Promoters don’t want to let go of their assets. This is a new India and businesses are still getting used to it.”

There’s much to be said in favour of the IBC—and plenty of people are saying it. What the IBC has done, says Mukesh Butani, managing partner, BMR Legal, is to put the fear of losing their assets among bankrupt corporates or wilful defaulters. So far, such defaulters could take public money, do whatever they wanted with it, and in case their business failed, could either get their loan restructured, or delay the repayment, or otherwise frustrate the recovery process through litigation or other means. “Without a proper exit for bankrupt companies,” says Dalmia, “Indian capitalism was socialism for the rich people.”

With strong voices in favour of the IBC, why then are there so many cases against rulings made under it? Today, virtually every decision of the NCLT or the resolution professionals—appointed by the lenders— has been either criticised or challenged in court. Divyanshu Pandey, partner, J. Sagar Associates, a law firm, says stakeholders (read promoters) are trying to maximise their gains by finding loopholes in the code.

Like many things, the IBC seems like a great idea. Implementation, however, is quite another thing. The litany of complaints against rulings under the IBC is getting louder and more discordant.

From the role of the resolution professional to the time given to come up with a resolution plan to voting rights of the consortium of lenders, there’s nothing that seems to be right. The Insolvency Code, in its current shape and form, seems more like an insolvent code, which is simply not able to get its act together.

Today India Inc. is drawing up new strategies, lining up legal luminaries, consultants, and chartered accountants, and joining hands with promoters, co-opting private equity and other financial institutions, all in a bid to fight provisions in the IBC.

The NCLT isn’t helping much. In a recent judgement, the principal bench of the NCLT in Delhi ruled that a resolution plan doesn’t really need to follow the letter of the law; the law, in this case, being the IBC. The case was that of Liberty House, a British industrial and metals company, submitting a bid for Bhushan Power and Steel after the deadline. It can be argued that Liberty House used information from other bids and submitted a higher one. The bid was rejected because it was filed late, and predictably, the case was taken to NCLT.

“The resolution plan of Liberty House shall not be rejected on the ground of delay emanating from process document or any other document internally circulated by the RP [resolution professional] or CoC [consortium of creditors],” went the judgement.

The NCLT itself is stuck between a rock and a hard place. On the one hand, it has to ensure that distressed companies are not liquidated without all other options being explored. On the other, it has to uphold provisions of the IBC which don’t allow much wriggle room.

Take the office of the resolution professional, who is to be appointed by the consortium of lenders under the IBC. The resolution professional’s job, as spelled out by the law, is to recommend a viable, sustainable resolution plan, that has the approval of 75% of the creditors. This has to be done in 270 days. This exercise has opened a whole new front in the battle against IBC provisions.

“How do you expect a resolution professional not only to understand the nuances of the business, calculate the claims of various creditors, figure out the long-term viability of the company, and then devise a resolution plan that will ensure that the company continues to generate enough cash flows to not just service its debts but generate profits too?” asks Pandey of J. Sagar Associates.

Remember, this job is made even more difficult because of the propensity of the creditors to go to court at the drop of a hat. What happens to the 270 days then? “The law isn’t very clear on whether the days spent in litigation should be included or excluded from the 270-day window,” says Kumar Saurabh Singh, partner at law firm Khaitan & Co.

Seshagiri Rao M.V.S., joint managing director and group CFO, JSW Steel, says the litigation period has to be outside the 270 days to save a company from liquidation. “Of course, there is an interpretation that the deadline cannot extend beyond 270 days,” he says. “But where there is time lost due to litigation, some flexibility is always better.

[The IBC] provides India with a self-correcting marketplace for the secure and trans-parent disposal of distressed assets.   
Aditya Mittal, president and CEO, ArcelorMittal

Keeping the door open to litigation has delayed matters for Essar Steel, for one. Recent judgements show that the time spent in litigation has not been counted as part of the 270 days, but the fact remains that there are still no finalised bidders. The earlier two bidders were disqualified and a new bidder (JSW Steel) has only recently shown interest. Things are up in the air at the time of going to press.

The reason for a swift resolution process is to ensure that there’s no further deterioration in asset quality. If promoters are unwilling to let this happen and do not share enough information, the core of the IBC breaks down.

Without a proper exit for bankrupt companies, Indian capitalism was socialism for the rich people.
Puneet Dalmia, MD, Dalmia Bharat Group

Of course, this is not the only thorny issue regarding the IBC. One of the other sore points is that the IBC forbids multiple rounds of bidding by companies for distressed assets. This means that the losing bidder cannot match a competing bid. On the face of it, this simply keeps bids competitive. But what it means is that potential buyers opt for out-of-court settlements, as has happened in the case of UltraTech Cement.

This is an unhealthy precedent because it means there’s no true price discovery of the assets. And that, in turn, means banks don’t get their share. Which means NPAs remain high, leading to a greater recapitalisation load on the government, and therefore the taxpayer.

The other problem is the need to get 75% of the creditors to agree to the resolution professional’s plan. This can lead to a situation where the smaller lenders can delay the process if they feel they aren’t getting enough. By repeatedly raising issues, these lenders can take a distressed asset to liquidation. It’s already happening; India Infrastructure Finance has challenged the bid evaluation process in the Jaypee Infratech case. The lender has demanded that the existing bid be “summarily scrapped” because of serious deficiencies and shortcomings.

Why should a promoter who has defaulted because of business failure not be allowed to bid for his company?
Amit Tandon, founder & MD, Institutional Investor Advisory Services

Lenders can create a different problem as well. The IBC leaves it to lenders to define a wilful defaulter, one who cannot bid under Section 29A. There are chances that the lenders can actually hold companies to ransom. That’s because the IBC’s definition is so vague as to create more confusion. The IBC talks about eight types of disqualifications. Among them are flaky descriptors like “connected person” and “related party”. What this means seems to have been left to the lenders.

This is why there’s a raging debate around eligibility criteria of bid - ders, especially in the case of bankrupt micro, small and medium enterprises (MSMEs), which may find no bidders at all in the NCLT. Isn’t it better to allow existing promoters to bid, rather than allow the company to go into liquidation? On the face of it, this seems the best solution. Unlike, say, steel giants that see plenty of takers, these companies interest only a niche.

There’s a case for allowing promoters back. Globally, success stories of companies coming out of bankruptcy have involved private equity firms, hedge funds, and vulture funds picking up the distressed asset, or existing promoters spearheading a restructuring effort. Some of the best examples are Texas Pacific Group and its investments turning around bankrupt airlines like Continental Airlines and Air Canada.

“Why would anyone, other than the existing promoter, bid for an engineering, procurement and construction (EPC) company, or a power plant that does not have a power purchase or a fuel supply agreement, or a even services company with little or no assets? The government should look at these issues too,” says Siby Antony, chairman and managing director, Edelweiss, Distressed Assets Resolution Business. The government seems to be listening. The recent Insolvency Law Committee report of March recommends MSMEs be exempted from certain provisions of Section 29A.

The result of all this is a toxic ecosystem that is not conducive for mediation, compromise, or resolution. This is not what the government intended with the IBC. Meanwhile, the NCLT is already feeling the strain of the number of cases coming to it. With only 11 benches, 18 judicial members, and seven technical members, the tribunal is unable to deal with all the cases transferred from the high courts, the Company Law Board, etc.

Financial advisory firm Alvarez & Marsal, in a report on NCLT’s readiness, has some stark facts to offer. Assuming that over the next three years, 25,000 cases move to the NCLT and the judicial strength ramps up to 50 and the judge handles 60 cases at any given time, it will take more than seven years to clear the current backlog.

This is a process which, I think,requires some patience and perspective ...Laws are made in parliament but tested in the courts.
Rashesh Shah, chairman & CEO, Edelweiss

Equally, some experts believe that these cases should stay with the NCLT, regardless of the time taken. “A major challenge is to ensure the sanctity and transparency of the NCLT process without allowing it to become a forum for just price discovery,” says Sunil Sinha, principal economist at India Ratings. If the Supreme Court or any other adjudicating authority were to allow an out-of-court settlement between a borrower and a lender then it would become just that.

There is an interpretation that the deadline cannot extend beyond 270 days. But where there is time lost [in] litigation,some flexibility is always better.
Seshagiri Rao M.V.S., joint MD & group CFO, JSW Steel

Meanwhile. resolution professionals are facing the wrath of promoters and lenders alike. Vijaykumar Iyer, the resolution professional for Binani Cement, has been threatened with legal action by 12 operational creditors including Image Mine Products and Swastik Coal for not keeping their interests in mind while drawing up the resolution plan. “If such frivolous cases are filed against them [resolution professionals], they will walk away because they too have a reputation and a credibility to uphold,” says Dalmia, adding that the resolution professionals should be answerable only to the consortium of lenders.

Any subversion of the NCLT process, says Dalmia, will send a wrong signal to international investors, keep out foreign companies and therefore limit the number of bidders and prevent true price discovery of the distressed assets. Mittal agrees, adding that the IBC was something that both foreign and responsible Indian investors have been demanding for several years. “Unfortunately, we are seeing many unintended consequences that will impact the time-table of the IBC,” he adds.

The IBC is definitely an idea whose time has come. But given this government’s track record on reforms in general (which, bluntly put, shows a serious implementation gap), it seems that the IBC has been rushed through. India’s lawmakers appear to have pandered to public opinion rather than attempt at bringing about a real change; with an eye on the ease of doing business ratings, the IBC appears to have been put together in a hurry just so the country can claim to have a law which allows an exit route to investors in failed businesses.

That said, people like Rashesh Shah, chairman and CEO of Edelweiss, believe it’s good to create a system and then change it on the fly. “This is a process which, I think, requires some patience and perspective. I think cases like Binani and all are very good cases because they will test the limits of the law and set it up for the future. Laws are made in parliament but tested in the courts.” Mittal adds that change is “a necessary companion to law-making, especially when you’re creating something new such as the management of bad assets, and defaulters who believe they have built layers of immunity. People recognise the IBC is being road-tested. You can either ignore the road bumps or fix them.”

Yes, things aren’t great with this iteration of the IBC, and changes are desperately needed. But lenders need some version of this code to be implemented. The RBI has shut all other avenues of funding for an ailing company. That includes schemes like corporate debt restructuring, joint lenders’ forum, and S4A or Scheme for Sustainable Structuring of Stressed Assets. If there’s no resolution process, as recommended under the IBC, there will be no option but to liquidate. And that will serve nobody’s cause.

(The article was originally published in the May 2018 issue of the magazine.)

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