January 29, 2018

Eleven big accounts referred by the RBI are yet to be resolved

The Survey talks at length of the Insolvency and Bankruptcy Code (IBC), touted as a key reform to address the festering twin balance sheet problem. While the Code is indeed a giant leap forward from the earlier regimes, the data put out in the Survey does not recount any meaningful success story thus far. While all the first set of large accounts referred by the RBI to the National Company Law Tribunal (NCLT), have asked for an extension of the 180-day deadline, the 10 cases where resolution has been approved by NCLT are too small to matter.

Crossing the deadline

For banks, that took as long as 15 years in certain cases to recover their money under the earlier insolvency machinery, the time-bound resolution under IBC was touted as a big game changer for the sector.

But the data shared by the Survey on the 525-odd cases admitted under IBC, reveal that a little over fifth of these cases have crossed the 180-day deadline for resolution. Under IBC, the timeline can be extended by another 90 days — failing which the corporate (borrower) would go into liquidation.

Of these cases, 11 pertain to the large accounts (first list of 12; Era Infra Engineering Ltd has not yet been admitted), referred by the RBI for insolvency under IBC last year. According to the Survey, all these accounts have either crossed or will be hitting their 180-day deadline soon. All for applied for 90-day extension, ending by March or April. Given that these accounts constitute nearly a fourth of the bad loans in the system, and probably stand the best chance to find bidders, lack of a resolution plan is a cause for worry. Claims admitted under the 11 accounts amount to a little over Rs.3 lakh crore.

Anomalies in resolved cases

The Survey reveals 10 cases where resolution plan has been approved by the NCLT. But in terms of value, the claims are far too small, to indicate a broader industry trend. Shree Metalik and Kamineni Steel & Power are the top two accounts, where claims of financial creditors are just Rs.1,200-1,500 crore. The recovery rate in these accounts have been 40-47 per cent. In most of the other cases, the recovery amount is less than a Rs.100 crore. Also, some of these 10 cases are currently in appeals already, according to Vinod Kothari, a financial and legal consultant and insolvency professional.

A case in point is Synergies Dooray Automotive, where concerns emerged after a resolution plan made by a company related to the corporate debtor was approved by the NCLT at a steep haircut. According to the Survey the recovery rate in this case of a mere 6 per cent.

It is also unclear as to how, in some cases like the Kamineni Steel & Power and Jekpl Private the resolution value is lower than the liquidation value. Liquidation value, as a concept, is the worst possible value for the assets, since liquidation assumption disregards the going-concern value of the assets, and looks at the value in disposal.

“Liquidation values were driving down resolution plans. This is what prompted the IBBI to amend the resolution rules to make liquidation values confidential, not to be shared until resolution plans have been submitted,” says Vinod Kothari.

He adds that several of the resolution plans are not offering upfront payment to creditors — they are going on retained-debt model, whereby the resolution applicant is proposing to pay the creditors over a period of time, going as far as 10 years or even longer.

[The Hindu Business Line]