Tag: Corporate Insolvency Resolution Process

Banks make higher-than-required provisions for Srei Group exposure

Banking & Finance

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Large public sector banks (PSBs) have proactively made substantially higher provisions, ranging from 40-100 per cent, towards their exposure to the Kolkata-based Srei Group against the usual regulatory requirement of 15 per cent.

Forensic audit

This is due to the uncertainty over what a forensic audit of the account may reveal and the haircut lenders may have to take under the corporate insolvency resolution process (CIRP) initiated against the group.

The Reserve Bank of India’s norms require banks to make a general provision of 15 per cent on their total outstanding exposure to a substandard asset. Unsecured substandard assets attract an additional provision of 10 per cent.

Bankers say they don’t want any surprises on the provisioning front in the coming quarters vis-a-vis the Srei account, which comprises Srei Infrastructure Finance Ltd (SIFL) and its wholly owned subsidiary Srei Equipment Finance Ltd (SEFL).

Moreover, recovery from the resolution of DHFL and healthy profit in the second quarter have given them the elbow room to increase the provisions.

The banks that have made higher upfront provisions towards their exposure to the Srei Group include State Bank of India (SBI, 100 per cent), Union Bank of India (UBI, 65 per cent), Bank of India and Central Bank of India (BoI, CBoI 50 per cent each), and Punjab National Bank (PNB, 40 per cent). PNB has an exposure of ₹2,600 crore to the Srei group, UBI ₹2,558 crore, BoI ₹1,024 crore in direct exposure and ₹970 crore via pooled route, and CBoI ₹1,149 crore. SBI’s exposure is believed to be over ₹2,000 crore.

₹26,476-crore borrowings

As at March-end 2021, the consolidated borrowings of the Srei Group stood at ₹26,476 crore. This includes term loans, working capital facilities, collateral borrowings and unsecured loans. Liabilities in the form of debt securities and subordinated liabilities stood at ₹2,441 crore and ₹2,785 crore respectively.

Governance concerns

RBI had, on October 4, 2021, superseded the Board of Directors of SIFL and SEFL. The central bank, in a statement, said it took this action owing to governance concerns and defaults by these companies in meeting their various payment obligations.

It appointed Rajneesh Sharma, Ex- Chief General Manager, Bank of Baroda, as the Administrator of the aforesaid companies.

The central bank’s applications for initiation of CIRP against SIFL and SEFL under the Insolvency and Bankruptcy Code (IBC), 2016, read with Financial Service Providers Insolvency Rules were admitted by the Kolkata Bench of the National Company Law Tribunal on October 8.

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Key solutions to avoid delay in Corporate Insolvency Resolution Process, BFSI News, ET BFSI

Banking & Finance

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Delay in resolving the bad debt of companies have led to disruption of assets for all parties, experts say. According to data, of the ongoing cases, 75% have already exceeded 270 days and took more than 400 days on average.

The Supreme Court also expressed its concerns in its ruling recently, and ordered that the corporate insolvency resolution process (CIRP) should not exceed more than 330 days.

Also read: Delay in resolutions raise questions on IBC regime

There is a need to remember the very essence of the Insolvency and Bank Code – timely resolution. To avoid delay and make CIRP faster, Ashok Paranjpe, managing partner at legal firm MDP & Partners, gives three solutions :

1. Preventing delay in admission of cases

One of the main reasons for delay in CIRP is at the root of it, admission of cases, he says. When it takes time to admit cases, the company remains under the control of the defaulting owner enabling value shifting, data transfers and funds diversion.

The adjudicating authority must make sure that the case is admitted within the stipulated time period of 14 days from the filing of the application. The abuse of the provision under Section 12 of IBC has led to delay in adjudicating the pending matters under National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). Additionally, any successful bidder should not be permitted to suggest changes to any scheme approved by the committee of creditors and the adjudicating authority.

2. Professional code of conduct for the committee of creditors

According to Paranjpe, there is an urgent need to have a professional code of conduct for the committee of creditors, which will highlight specific duties and powers to take decisions on resolution plans, selection of the interim resolution professional and resolution professional.

3. Experienced and trained members of NCLT and NCLAT

It has been observed that very often orders passed by NCLT are appealed against to the NCLAT and ultimately the Supreme Court due to the lack of quality decisions from the judicial members of the adjudicating authorities. Recently, the Centre cleared appointments of 18 members to various tribunals in India, owing to the growing criticism over delays in filling up vacancies in NCLT.

Click here to read our coverage on IBC



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IBBI puts more onus on RP, says dutybound to find frauds, BFSI News, ET BFSI

Banking & Finance

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Seeking to enhance transparency in the insolvency process, IBBI has amended regulations for corporate insolvency proceedings wherein a resolution professional will be required to provide details about his or her opinion about avoidance transactions pertaining to a corporate debtor.

The Insolvency and Bankruptcy Board of India (IBBI) has amended the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations.

The amendments to the regulations are aimed at enhancing “the discipline, transparency, and accountability in corporate insolvency proceedings”.

A resolution professional is duty-bound to find out if a Corporate Debtor (CD) has been subject to avoidance transactions, namely, preferential transactions, undervalued transactions, extortionate credit transactions, fraudulent trading and wrongful trading, and file applications with the adjudicating authority seeking appropriate relief.

This not only claws back the value lost in such transactions increasing the possibility of reorganisation of the CD through a resolution plan, but also disincentivises such transactions preventing stress to the CD.

“For effective monitoring, the amendment requires the RP to file Form CIRP 8 on the electronic platform of the Board, intimating details of his opinion and determination in respect of avoidance transactions,” the release said.

The IBBI has put out the format of form CIRP 8 and it needs to be filed in respect of every CIRP ongoing or commencing on or after July 14.

Intimation of changes

With the amended regulations, an insolvency professional conducting CIRP will also have to disclose all former names and registered office address(es) so changed in the two years preceding the commencement of insolvency along with the current name and registered office address of the CD, in all its communications and records.

CIRP refers to the Corporate Insolvency Resolution Process.

The amendment takes into account the possibility where a CD may have changed its name or registered office address prior to commencement of the insolvency process. In such cases, the stakeholders may find it difficult to relate to the new name or registered office address and consequently fail to participate in the CIRP.

Roping in professionals

Under the insolvency regulations, an interim resolution professional or a resolution professional may appoint any professional, including registered valuers, to assist him in the discharge of his duties in the conduct of the CIRP.

“The amendment provides that the IRP/RP may appoint a professional, other than registered valuers if he is of the opinion that the services of such professional are required and such services are not available with the CD.

“Such appointments shall be made on an arm’s length basis following an objective and transparent process. The invoice for a fee shall be raised in the name of the professional and be paid into his bank account,” the release said. The amendments have come into effect from July 14.



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IBC cases per RP may be capped, Code of ethics strengthened, BFSI News, ET BFSI

Banking & Finance

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The Indian Institute of Insolvency Professionals of ICAI (IIIPI) is working on a four-point plan for insolvency professionals.

The plan includes setting limits on the number of permissible assignments for each executive and their role in the prepack package for MSMEs.

The plan

IIPI has conducted study groups on four matters of contemporary topics on enhancing the role of small-sized IPs, response of insolvency regime to Covid, clarifying roles of IPs in respect of prepack framework for MSMEs, and creating code of ethics for our professional members.

The reports of these study groups are may take a month to complete.

The self-regulator and IBBI are aiming to strike a balance between resolution professionals coming from large institutions and standalone individual IPs, with the latter often finding themselves at a relative disadvantage in comparison with executives from top-draw consultancies.

IIIPI is also set to recommend urgent covid-response measures that IPs will likely follow in proposing any resolution plan. The quasi-judicial body is also defining a prudent role of IPs in the pre-packs.

IIIPI is drawing on best practices to craft a role for MSMEs, where promoters face default occasions due to macroeconomic environment or policy changes.

It has tapped legal expertise in the UK where prepack packages are a hit.

IIIPI is drawing a code of ethics by adding more clauses to the IBBI statute already available.

The recommendations would need to be approved by both the Insolvency and Bankruptcy Code of India (IBBI) and the government.

There are 3,500 insolvency professionals, three insolvency professional agencies, 80 insolvency professional entities, 4,000 registered valuers, 16 registered valuers’ organisations and one information utility.

IBC cases per RP may be capped, Code of ethics strengthened

IBC so far

Since the provisions of the Corporate Insolvency Resolution Process (CIRP) came into force on December 1, 2016, a total of 4,376 CIRPs have commenced till the end of March this year.

Out of the total, 2,653 have been closed, including 348 CIRPs that ended in approval of resolution plans. As many as 617 CIRPs were closed on appeal or review or settled, while 411 were withdrawn and 1,277 ended in orders for liquidation, as per IBBI’s latest quarterly newsletter.

Significant improvements in the score for resolving insolvency made doing business in India easier and the emergence of new markets for resolution plans, interim finance and liquidation assets are among others.

Apart from the few missing elements such as cross border and group insolvency to complement corporate insolvency, an institutional framework for grooming a cadre of valuers is sometime away.

As compared to the previous regime which took nearly five years for a conclusion, the process under the Code yielding a resolution plan takes on average 400 days. It, however, falls short of intended 180/270 days.



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DHFL reports net profit of Rs 96.75 crore in Q4

Banking & Finance

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Dewan Housing Finance Corporation Ltd reported a consolidated net profit of Rs 96.75 crore for the fourth quarter of 2020-21 as against a net loss of Rs 7,507.01 crore a year ago.

For the full fiscal 2020-21, it had a consolidated net loss of Rs 15,051.17 crore compared to a net loss of Rs 13,455.81 crore in 2019-20.

For the quarter ended March 31, 2021, DHFL reported a 22.4 per cent drop in its total revenue from operations at Rs 2,034.53 crore versus Rs 2,623.40 crore a year ago.

Total income also declined to Rs 2,060.57 crore for the fourth quarter last fiscal from Rs 2,160.98 crore a year ago.

“…the company has not made any provision for interest on borrowings amounting to Rs 1,91,213 lakh and Rs 7,65,155 lakh for the quarter and year ended on March 31, 2021, respectively, in view of the company’s current Corporate Insolvency Resolution Process (CIRP),” said the results.

Had the interest was accrued on borrowings and provided for, the profit for the quarter ended March 31, 2021 would have been lower by Rs 1,42,205 lakh (net of taxes) and the loss for year ended March 31, 2021 would have been higher by Rs 5,69,046 lakh respectively (net of tax), it further said.

As on March 31, 2021, it had a negative net worth of Rs 20,645.31 crore. Total assets amounted to Rs 70,358.66 crore while total liabilities stood at Rs 91,003.97 crore.

The investments and advance by way of unsecured Inter Corporate Deposit (ICD) including interest receivable aggregating Rs 4,109.24 crore are outstanding as on March 31, 2021. The provision for the entire ICD amount has been made due to lack of security.

Noting that DHFL has accumulated losses due to which its net worth has been fully eroded, the auditor’s note said that its ability to remain as a “going concern” depends on the outcome of the ongoing CIRP.

“During this quarter ended on March 31, 2021, additional transactions amounting Rs 12,73,574 lakh have been identified and reported by the company to Stock Exchanges and National Housing Bank and RBI as fraudulent, undervalued and preferential in nature,” it further said.

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