At a recent conference organised by India Infrastructure on Debt Restructuring and Refinancing, Jyoti Sharan, General Manager, Mid Corporate Group, State Bank of India, spoke about the strategic debt restructuring (SDR) experience in India and the way forward with the Insolvency and Bankruptcy Code (IBC)…
SDR: The Indian experience
Introduced by the Reserve Bank of India (RBI) in June 2015, the SDR scheme has failed to take off. The reason for the ineffectiveness of the scheme is twofold. One is the bloated debt profile of most of the corporates in the country and the next is the lower capacity utilisation, meaning that the economy is not showing visible signs of improvement. Further with the introduction of the IBC, an interested buyer is of the belief that once the case gets referred to the National Company Law Tribunal (NCLT), he gets a better opportunity of taking over a company. Another issue is that deep haircuts arising from a mismatch in the value of assets are unacceptable to the lenders. In the cases experienced so far, the haircuts typically fall in the 80-85 per cent range for mid-size companies.
Issues and challenges
In most of the cases reported under SDR scheme, there has been the issue of an inability to find the buyer, due to reasons as mentioned above. Further, the 210-day period for the conversion of debt equity is a very tight window, especially in cases dealing with larger assets where many formalities and processes are involved. However, it is not unachievable. From April 2017 onwards, even asset reconstruction companies have been reluctant to come on board on account of the NCLT issue.
Under SDR, the first step is the submission of the resolution proposal by the promoter/ strategic investor followed by a discussion between promoters/investors regarding the acceptable terms and conditions. After a lot of deliberation and discussion, a consensus is reached and the resolution plan is finalised which is preceded by a techno-economic viability study, investigative audit of the enterprise, etc. Once this is done, there are no problems in the documentation stage. Problems in this stage crop up only when a particular item has not been discussed and the investor is not aware of it.
The way forward
With the introduction of the IBC, SDR will lose its utility as most of the resolutions are likely to occur through the NCLT route. As compared to SDR, which primarily talks about a change of management, under the Scheme for Sustainable Structuring of Stressed Assets (S4A), the existing promoter can continue to run the asset and be in control of the company. Therefore, the NCLT may not be a major issue with regard to cases under S4A.
As per the latest IBC ordinance, if a promoter has been classified as a willful defaulter, he is not allowed to bid. Further, if the asset has been non-performing for a year, then the promoter is allowed to bid on the condition that the entire overdue amount is paid. With the promoter at the helm of affairs, better price recovery is expected. However, there is a need to classify promoters into two groups- those facing problems on account of market conditions or external influences outside their control and those facing problems as a result of their own actions, that is, the wilful defaulters. Therefore, it would be prudent to eliminate the second category of promoters from the bidding process, but the first category should be allowed to participate in the process.
A major positive of the IBC is that the code creates time-bound processes for insolvency of corporates/firms. The resolution processes are to be completed within 180 days. If the resolution does not take place, the assets of the borrower may be sold under a liquidation process to repay creditors. However, of late, even resolution through the NCLT is becoming an issue as enough interest in the assets is not witnessed as per the expectations of the lenders.
Ultimately, banks will have to fall in line with the regulations. Nonetheless, the Indian bankruptcy reform is work in progress and there are still many areas of concern which remain to be addressed.