Insolvency, bankruptcy: India
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Insolvency and Bankruptcy Code 2016
2016: Parliament passes comprehensive bankruptcy code
The Times of India, May 12 2016
Insolvency code to ease closure of sick units gets House nod
Parliament passed a comprehensive bankruptcy code, a longpending grudge with international investors, which will help speed up closure of unviable companies and revival of viable entities.
The lack of a bankruptcy code is one of the key reasons for India ranking low on the ease of doing business rankings, since it takes several years to wind up a business. Currently , there are a dozen laws dealing with various aspects of sickness and closure, and the one related to insolvency is over a century old.
Through the new law, which was cleared by the Rajya Sabha on Wednesday evening, the government is trying to put in place a speedy process for early identifi cation of financial stress and resolve the strain if the business is found viable. It has stipulated a time-bound revival. The new law comes at a time when lenders are dealing with a record pile of bad debt, for which the government has also sought to amend existing laws to make recoveries smoother.
“The essential idea of the new law is that when a firm defaults on its debt, control shifts from the shareholderspromoters to a committee of creditors, who have 180 days in which to evaluate proposals from various players about resuscitating the company or taking it into liquidation. When decisions are taken in a time-bound manner, there is a greater chance that the firm can be saved as a going concern, and the productive resources of the economy (the labour and the capital) can be put to the best use. This is in complete departure with the experience under the SICA (Sick Industrial Companies Act) regime where there were delays leading to destruction of the value of the firm,“ the finance ministry said in a statement.
The new system provides for two processes for resolution of individual cases -fresh start and insolvency resolution.
It also puts the dues of the employees at the top of the pile with certain creditors getting preference over the government. In addition, it provides for powers to acquire overseas assets of a defaulter, for which the government has to sign global agreements.
FM seeks opposition support for GST
New Delhi: FM Arun Jaitley on again urged Congress to support the bill that seeks to amend the Constitution for the introduction of goods and services tax (GST) after the principal opposition party suggested it would offer support, provided its three key recommendations are accepted.
“For heaven's sake, I beseech you in the interest of Indian democracy not to go on this misadventure (judge-headed panel)...With the manner in which encroachment of legislative and executive authority by India's judiciary is taking place, probably fi nancial power and budget making is the last power that you have left. Taxation is the only power which states have,“ he said during the debate on the finance bill in the Rajya Sabha.
The minister said it was “wholly misconceived“ for any political party to hand over the taxation power to judiciary . Jaitley asked Congress to “reconsider“ its stance on GST, which is held up as Congress wants the government to specify the GST rate in the bill, provide for an independent dispute resolution mechanism, and drop the plan for an additional 1% levy by manufacturing states.
Impact of 2016 law
See graphic, ' Impact of law '
The extent of the problem
See graphic, 'Major defaulters on bank loans, 2017 '
Promoters of insolvent companies cannot bid for ailing entities
New ordinance to strike loan defaulters another body blow, November 23, 2017:The Times of India
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From: New ordinance to strike loan defaulters another body blow, November 23, 2017:The Times of India
The government recommended an ordinance to significantly tighten the norms to bar promoters of companies facing.
insolvency proceedings from bidding for the ailing entities, a move that will shut out several business families from vying with competitors and overseas funds.
Apart from seeking to ban bidding by wilful defaulters, the Insolvency & Bankruptcy Code will be amended to disqualify a tainted promoter in control of an entity that has been a ‘non-performing asset’ for a “prescribed period”, which may be fixed at one year. A continuous loan default for 90 days forces banks to classify a borrower as an NPA.
The one-year clause will make promoters of some of the 12 large companies facing insolvency action — like the Ruias of Essar Steel and Singhals of Bhushan Steel — ineligible to submit bids for their companies next month. Bankers said both were classified as NPAs in 2015.
Insolvency board gets more powers to prescribe eligibility norms for bidders
The one-year clause may help reduce competition for companies such as JSW, Tata Steel, Arcelor Mittal and Nippon Steel and comes with the risk of bids being less aggressive.
The 12 companies, which account for nearly a quarter of the NPAs, were referred to the National Company Law Tribunal by banks led by State Bank of India and IDBI Bank after the Reserve Bank of India stepped in to clean up the unprecedented pile of bad debt that added up to nearly Rs 8.4 lakh crore on last count. The list includes Bhushan Power & Steel, Jaypee Infratech, Monnet Ispat, Amtek Auto and ABG Shipyard.
Finance minister Arun Jaitley told reporters that the cabinet had recommended amendments but did not comment on the provisions. Details of the ordinance are expected only after President Ram Nath Kovind approves it. With the winter session expected to be convened on December 15, the ordinance is likely to be promulgated over the next few days.
The government had enacted the Insolvency & Bankruptcy Code last year, which provides for a revival plan in a maximum of 270 days. During this period, the company is handled by an NCLT-appointed resolution professional. The government opted to amend the law in less than a
year as it feared that some promoters may end up acquiring the company at a steep discount, leaving banks to grapple with the pile of loans.
“A number of cases are likely to have long-pending default requiring deep haircut for the creditors. It is, therefore, necessary to ensure that promoters of the corporate debtor or the company, who are found to have contributed to the default, need to be prevented from regaining control through back door entry in the garb of a resolution applicant,” said a source.
The ordinance also gives more powers to the Insolvency and Bankruptcy Board of India to prescribe eligibility norms for prospective bidders or resolution applicants while keeping in mind the complexity and scale of operations of business of the ailing company.
Lenders as well as industry experts are closely watching how the government defines the “prescribed period” and its implications on the overall business environment. “A company gets into financial stress because of various reasons such as technological obsolescence or sudden change in policies, including court pronouncements such as cancellation of coal blocks or spectrum. By barring all promoters, you may be hitting the entrepreneurship environment,” said a top executive with a leading bank.
Industry experts also said that some of the norms proposed by the government opened the doors to further litigation. For instance, a promoter can be classified as a wilful defaulter and not allowed to bid but the court overturns the lender’s decision later.
“The disqualification on account of the debtor being a non performing account is harsh as there could be genuine reasons for default. Businesses succeed but also fail and a bonafide failure should not be punished. As a society we need to learn to forgive an unfortunate debtor and give him a second chance. Failure can also be as legitimate as success,” said Sumant Batra, managing partner at law firm Kesar Dass B & Associates, who is involved in several cases.
Apart from the 12 companies which are already in various stages of resolution, at least 40 other companies are being reviewed by banks after an RBI directive and the ordinance will also have an impact on them.
Impact: banks get tough with defaulting promoters/ 2017
Till now, the business phrase “exit policy“ meant the exit of workers, to allow owners to survive and flourish. Now, for the first time, India has an exit policy for owners that allows workers to survive and flourish. If it succeeds, it may go down as Narendra Modi's finest achievement.
India is famous for having many sick industries but no sick industrialists, whose political clout (and legal delays) precluded seizure of their assets by lenders. That has changed dramatically with the enforcement of the Insolvency and Bankruptcy Code 2016. The RBI is using this to force banks to get tough with defaulting promoters, forcing them to sell assets to repay debts and make their companies solvent. If this does not work, the banks will eject the promoters, and appoint a professional manager to run the company till it is auctioned to new buyers.
This is a revolutionary change. In June, the RBI identified 12 major companies for insolvency proceedings, each owing over Rs 5,000 crores. Bhushan Steel, Electosteel Steel and Lanco Infratech headed the dirty dozen, owing a whopping Rs 1,75,000 crore (almost a quarter of all bad bank loans).
Reports say the RBI has prepared a second list of 40 companies, including giants like Videocon and Jindal Steel and Power Ltd. The top 500 defaulters face similar action. The finance ministry backs a “zero tolerance“ policy for bad loans.
Many questions remain. Will new buyers be available? Will these ask for such high loan forgiveness in the takeover package that banks will refuse, leading to stalemates? Will old owners regain control at bargain prices via benami companies in tax havens? Time will tell. Yet let's hope for a new era where industrial might is no protec tion against the rule of law, and the exit of celebrated but defaulting industrialists is not only possible but happening. True capitalism requires exit for capitalists no less than workers.
Once, Vijay Mallya was politically so powerful that banks kept ever-greening loans to his sinking Kingfisher Airlines. He hoped to survive a debt of Rs 9,000 crore, as industrialists always had.But when the BJP government moved to arrest him, he fled abroad in 2016. His assets in India -including holdings in United Breweries and United Spirits -have been seized. The Enforcement Directorate claims these assets will cover his bank dues of Rs 9,000 crore, and awaits court clearance for an auction.
The Essar Group ran up huge debts to expand its empire, among allegations of inflated capital costs. Lenders have forced it to sell Essar Oil, which includes India's second biggest oil refinery, its captive port at Vadinar, a power station of 1,010MW capacity, and 3,500 filling stations. The $12.9 billion sale to Rosneft will enable the group to halve its debts, and probably hang on to indebted Essar Steel. However, the group's debts remain huge at Rs 70,000 crore.
The Jaiprakash Group (Jaypee) had a spectacular rise in the 2000s as it borrowed hugely to fund enormous infrastructure projects and real estate. That bubble then burst. The initial reaction of banks was to keep extending their loans to Jaypee despite defaults: this was business as usual. But in today's new era, they have leaned on Jaypee to sell its cement plants to the Birlas for a reported Rs 16,000 crore. As part of its debt recasting plan, the banks are reported to have taken over Jaypee's land assets worth over Rs 13,000 crore. Never before have owners ever been obliged to part with such massive, profitable assets to repay old debts.
Ousting promoters is not an end in itself.Many promoters were unlucky, including those hit by land acquisition delays, and those who built power plants but could not get fuel from Coal India. “Resolution“ in banking terminology means a deal where the lenders and owners (and sometimes trade unions) all agree to take a hit so that the enterprise becomes viable again.Resolution is the simplest and most preferred outcome. But it is feasible only when company assets are still substantial and the business is fundamentally viable. Resolution will not work for run-down companies with worthless assets.
In the old days, banks kept lending till a company became worthless, and closed without paying workers. The new approach is to seize a defaulting company while it still has good assets, revive it through resolution, or else go for a forced sale to a new buyer. The owner will exit but most workers will remain employed. It remains to be seen if this works. If it does, how marvellous!
Lenders that abstain from voting process deemed to have voted against
Bankers plan to replicate the rigid timelines and forced decision-making that is ingrained in the Insolvency and Bankruptcy Code (IBC) in other forums where they meet to decide on resolution of bad loans outside bankruptcy proceedings.
A major highlight of the bankruptcy process is that lenders are not allowed to abstain from the meetings or voting process. If they do, they are deemed to have voted against the proposals. This has forced fence-sitters to be more active in the bankruptcy process. Besides the voting and compulsion to be present, a key feature of the IBC is the fixed timeline of six to nine months within which lenders have to agree on a resolution, failing which the business gets liquidated.
A senior banker with a large state-owned lender said that a decision has been taken in the Joint Lenders’ Forum (JLF) that banks will be forced to vote and a decision to abstain is treated as a vote against. The JLF as a forum was created by the Reserve Bank of India in 2014 to address cases of default where there are multiple lenders and the loan size is above Rs 100 crore. However, due to various shortcomings, the JLF was not able to successfully address the issue of nonperforming assets (NPAs).
Sapan Gupta, partner and head of banking and finance at Shardul Amarchand Mangaldas & Co, said, “The IBC is one of the methods for banks to pursue recovery and, in the current environment, IBC is the first option. At some point of time, banks will have to examine various other options including the JLF. So the learning from one framework can get transferred to others.”
According to Gupta, the biggest contribution of IBC is that it makes it compulsory for everyone to attend and if they do not attend it is a ‘no’ vote. “Voting has to happen either immediately when 100% of the committee of creditors (CoC) is present or within 72 hours of the CoC meeting through electronic vote. Those timelines are not there in JLF which leads to indecisiveness,” said Gupta. “Also, the voting is related to loan exposure as against JLF which goes by number of votes. JLF also needs to take into account different types of lenders including non-institutional.”
Another issue that currently comes in the way of resolution is that different lenders choose different forums to pursue recovery. “Bankers can take a stand that, when a bad loan is being pursued under JLF, the lenders will not seek any other remedy so that the borrower can focus and provide a solution,” said Gupta.
Procedure
The government said insolvency resolution plans, such as sale and transfer of assets, do not require approval from shareholders or the company as the law provides a detailed process from the receipt of the resolution plan to approval by the adjudicating authority.
The clarification by the ministry of corporate affairs is expected to speed up the process of resolving cases facing insolvency action in various benches of the National Company Law Tribunal (NCLT), which range from large steel companies such as Essar Steel and Bhushan Steel to real estate players such as Jaypee Infratech and some of the companies of the Amrapali Group. A number of these cases are now nearing the deadline for working out a resolution plan, which is fixed at 180 days, with a 90-day extension possible.
It will also help push through resolution in insolvency cases where the original promoters of the company seek to block a plan by insisting on a vote in line with the provi sions of the Companies Act or Sebi norms.
The government is of the view that Insolvency and Bankruptcy Code (IBC) provides that the resolution plan will be binding on a company , its shareholders, lenders, employees, guarantors and other stakeholders if approved by NCLT. But it has suggested that the onus of ensuring that the plan is in line with norms is with the committee of lenders and the insolvency resolution professional. “It is understood that the requirements... of the Code (IBC) ensure that resolution plan(s) considered and approved by the committee of creditors and the adjudicating authority is compliant with the provisions of the applicable laws and therefore is legally implementable,“ the ministry said. It pointed out that a resolution plan should not allow for 100% foreign investment when the FDI ceiling for the sector is 75%.“The purpose is to prevent approval to resolution plans, which are not legally implementable,“ it said.
Sources said that there was confusion due to different legal opinion given by insolvency lawyers, some of whom believed that any resolution plan needed to be endorsed by shareholders. There was an opposite views as well, which were heard by the ministry and the Insolvency and Bankruptcy Board of India, the agency responsible for the new law, which decided to issue the circular to ensure clarity.
