Tag: IBC

Insolvency and Bankruptcy Code delays pit NCLAT against NCLT, BFSI News, ET BFSI

Banking & Finance

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Worried by the rising number of appeals before it, the National Company Law Appellate Tribunal (NCLAT) has said that there is a need to introduce a provision granting it supervisory power over the NCLTs across the country.

Due to the lack of such powers under the present laws, several people who are aggrieved by the National Company Law Tribunal (NCLT) are compelled to approach it by filing an appeal before it.

International Recreation

The appellate tribunal observation came while passing an order passed over a petition filed by the resolution professional (RP) of International Recreation and Amusement, who was aggrieved of frequent adjournments being granted by the NCLT and re-notifying the matter time and again.

According to RP, a resolution plan is pending approval before the Delhi bench of NCLT since 2019 and the matter has been adjourned as many as 18 times.

“This is not the first case of such nature,” said a two-member NCLAT bench headed by Acting Chairperson Justice B L Bhat.

The appellate tribunal further said: “There is a need to introduce a provision in the legal framework to vest power of superintendence and control qua National Company Law Tribunals in this Appellate Tribunal.

“Due to lack of supervisory jurisdiction many aggrieved persons are compelled to adopt the route of filing the appeal though there is no order on merit,” it said.

NCLAT has directed NCLT to “take a call and pass an order on merit with regard to the Resolution Plan pending consideration before it within two weeks”.

It has asked to send a copy of this order to the NCLT.

NCLT had initiated an insolvency process against International Recreation and Amusement, which had operated India’s first Amusement Park “Appu Ghar”, which was triggered on August 3, 2018.

K S Oils

Recently, the National Company Law Appellate Tribunal (NCLAT) directed to initiate the liquidation process of edible oil company K S Oils Ltd and set aside an NCLT order passed against it. Terming it “unfortunate”, the appellate tribunal observed that even after the lapse of 981 days and repeated compliance by the Resolution Professional to initiate the liquidation process, the NCLT had not considered it.

“The Appeal is allowed and the impugned order dated January 1, 2021, passed by the Adjudicating Authority (NCLT) is set aside and at the same time the order for initiation for liquidation of the Corporate Debtor Ms. K.S.Oils Ltd is also allowed. The Corporate Debtor- K S Oils shall liquidate in the manner as laid down in Chapter-III of the Code,” it said.

Earlier, on January 1, 2021, the Indore Bench of the National Company Law Tribunal (NCLT) had dismissed the application filed by the RP of the debt-ridden company to initiate liquidation against K S Oils after it could not attract a buyer within the permissible time frame.

Leading bank SBI, one of the CoC Member, on behalf of joint lenders forum who collectively holds 76.53 per cent had moved NCLAT based on which the appellate tribunal had on November 18, 2019, directed lenders to consider revised plans if any within two weeks and directed NCLT to pass appropriate order in accordance with the law.

Delays

As on September 30, 2021, out of the 1,942 ongoing insolvency resolution cases as of September 30, 2020, as many as 1,442 have been stretched beyond 270 days, while 349 such cases have been pending for periods of more than 180 days but less than 270 days.

The 221 CIRPs that saw resolutions took an average of 375 days for the conclusion, exceeding the maximum 330 days permitted. The 914 cases under liquidation took on an average 309 days for the conclusion.



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IBC is less of resolution and more of liquidation, BFSI News, ET BFSI

Banking & Finance

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Bankers feel that they are not getting a good price under the Insolvency and Bankruptcy Code, which has seen dismal recoveries in many cases.

“IBC is not the right solution. It is a resolution tool. If there is no resolution, automatically it goes to liquidation. That is a big problem. Resolution can be made if the underlying business is robust, says Siby Antony, chairman of the ARC Association of India.

He says banks feel that they are not getting the right price in IBC.

“Alok Industries was thought to be a very good asset but went for 17%. Binani Cement, Essar Steel were robust businesses and saw interest from strategic investors. But there are hundreds of assets where there is no interest from investors. These are smaller assets,” he said.

The status of IBC cases

Out of the total 3,774 cases or corporate insolvency resolution processes (CIRPs) filed since the Insolvency and Bankruptcy Code (IBC) came into existence in 2016, 1,604 cases, or 43 percent have closed, by way of resolution, liquidation or other means. The rest 57 percent are ongoing with many overshooting the 330-day maximum time limit.

Of the 1,604 closed cases, only 14 percent have found a resolution, whereas 57 percent have ended in the liquidation of the companies.

Interestingly, the 72% cases of CIRPs ending in liquidation were already defunct and under the Board for Industrial and Financial Reconstruction.

About 312 cases have been closed on appeal or review or settled, 157 have been withdrawn; 914 ordered for liquidation and 221, saw approval of resolution plans.

The recovery rate for resolved cases under IBC is 44% with Rs 1.84 lakh crore recovered so far of the Rs 4.13 lakh crore admitted claims.

In case of the 12 large defaulters identified by RBI, the creditors recovered Rs 1.36 lakh crore from eight cases that have been resolved so far, with recoveries ranging from as low as 17 percent of claims in the case of Alok Industries, to almost 100 percent for Jaypee Infratech.

N Kamakodi, MD & CEO of Citi Union Bank said he preferred the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFESI) over IBC.

“Since our focus is more on SME lending, we have control over the assets of the borrower. Hence, most of our resolution plans are through SARFAESI action more than the IBC.”

He added, “What is more important is whether the borrower has the skin in the game. When you want to sell it as a going concern and when there is a sufficient value, then IBC is preferable. But if the borrowers’ skin in the game is less, then the SARFAESI is a better option.”

The delays in NCLT

The 221 CIRPs that saw resolutions took an average of 375 days for the conclusion, exceeding the maximum 330 days permitted. The 914 cases under liquidation took on an average 309 days for the conclusion.

As on September 30, 2021, out of the 1,942 ongoing insolvency resolution cases, as many as 1,442 have been stretched beyond 270 days, while 349 such cases have been pending for periods of more than 180 days but less than 270 days.
As on September 30, 2021, out of the 1,942 ongoing insolvency resolution cases, as many as 1,442 have been stretched beyond 270 days, while 349 such cases have been pending for periods of more than 180 days but less than 270 days.

As on September 30, 2021, out of the 1,942 ongoing insolvency resolution cases, as many as 1,442 have been stretched beyond 270 days, while 349 such cases have been pending for periods of more than 180 days but less than 270 days.

Recently, the National Company Law Appellate Tribunal (NCLAT) directed to initiate the liquidation process of edible oil company K S Oils Ltd and set aside an NCLT order passed against it. Terming it “unfortunate”, the appellate tribunal observed that even after the lapse of 981 days and repeated compliance by the Resolution Professional to initiate the liquidation process, the NCLT had not considered it.

Leading bank State Bank of India, one of the Committee of Credit (CoC) Member, on behalf of joint lenders forum who collectively holds 76.53 per cent had moved NCLAT based on which the appellate tribunal had on November 18, 2019, directed lenders to consider revised plans if any within two weeks and directed NCLT to pass appropriate order in accordance with the law.

Bad bank challenge

The government is planning to set up a bad bank and an asset management company (AMC). Loans greater than Rs 500 crore which have not been declared fraudulent will be transferred to the bad bank. It is likely that the assets would not be subjected to IBC in the first instance, and the AMC will first try and revive these companies or package the loans to an investor.

Bad Bank
Bad Bank

Also, creditors of several companies had signed the Inter Creditor Agreements (ICA) and may continue negotiation under the framework roping in distressed asset investors. Also, most of the ICA cases will have loans greater than Rs 500 crore, which will be transferred to the bad bank. MSME will be outside the scope of IBC pending notification of the designated framework.



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A flurry of insolvency applications soon as IBC suspension uplifts on March 24, BFSI News, ET BFSI

Banking & Finance

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The Insolvency and Bankruptcy Code (IBC) which is currently under suspension till March 24, 2021 in the backdrop of Covid-19 pandemic will now make a return as the economy strongly recovers, said KR Saji Kumar, Joint Secretary, Ministry of Law and Justice on Saturday.

Speaking at a virtual event of ETCFO.com, he said, “There isn’t any request from any stakeholders to continue with the suspension…We are not going for any more suspension. The gates are going to be opened 25th March 2021.”.

He believes the return of the law could possibly see flood of insolvency application at the courts but the regulation and systems have matured to deal with the surge in insolvency applications.

Kumar said, “We are again going to witness flood of applications, maybe another challenges to IBC process…But we have learnings now. We will be able to deal with it.”

He backs the government’s decision to put a halt on the regulation as it was need of the hour back then as the economy was in peril at that point in time.

The central government had suspended the IBC regulation to prevent businesses from going bankrupt due to Covid-19 related stress. The initial ban was for six months but was later extended for up to a year till March 24, 2021. Post which, the central bank had come up with one-time restructuring under its June 7 (2019) circular dealing with resolution of stressed assets.



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How the proposed bad bank will impact IBC?, BFSI News, ET BFSI

Banking & Finance

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After experimenting with debt recovery tribunals, SARFAESI and IBC, the government is setting up a bad bank.

The Union Budget 2021-22 has proposed the setting up of an asset reconstruction company a bad bank and an asset management company, which will rival the current Insolvency and Bankruptcy Code mechanism for large corporate loans.

Experts say loans greater than Rs 500 crore that have not been declared fraudulent will be transferred to the bad bank, statement of several senior officials in the government as well as Indian Banks Association have indicated.

Currently, all insolvency resolution cases are dealt by the IBC, which has been under suspension till March 24, 2021.

It is highly likely that the underlying companies would not be subjected to IBC in the first instance, rather the AMC will try and either revive these companies or package the loans to an investor, they say.

This is despite ARC is the last resort for bankers as the recovery rate is very low. However, in the case of the IBC, the rate has also been dismal.

Also, creditors of several companies had signed the Inter Creditor Agreement (ICA), pre-suspension and some of these corporates will continue negotiation under the framework roping in distressed asset investors.

IBC performance

The total number of corporate insolvency resolution process (CIRP) cases admitted under IBC till the second quarter of 2021 stood at 4,008, of which 277 ended in resolution, or firms getting new promoters, and 1,025 in orders for liquidation.

The total claims were Rs 10.48 lakh crore (Rs 4.34 lakh crore Gross NPAs plus Rs 6.14 lakh crore Net NPAs) and the realisable” amount Rs 2.2 lakh crore. This amounted to the total haircut at Rs 8.3 lakh crore, or debt recovery working out to be 79%

This dismal debt recovery rate is far lower than the earlier debt resolution processes when the recovery was 25%. Also, most of the debt claims — Rs 6.8 lakh crore or 59% of the total ended in liquidation.

Challenges

Experts say IBC faces new challenges including two-year loan restructuring the RBI allowed in August 2020 due to pandemic disruptions, the Supreme Court‘s September 2020 interim order to banks not to classify loans as NPAs until further orders and dilution of the IBC itself.

After resigning as the RBI Governor in December 2018, Urjit Patel wrote in his book “Overdraft: Saving the Indian Saver” that the government had diluted the IBC and weakened the RBI’s regulatory powers to resolve stressed assets after it issued a “revised framework” on February 12, 2018, asking banks to start resolution process after a day’s default.

The bad bank

Nine banks and two non-bank lenders, including the State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda

(BoB), are coming together to jointly invest Rs 7,000 crore of initial capital in a proposed bad bank that aims to help extract funds stuck in bad loans. Two other state-run financiers of power projects will also own stock in the bad bank.

Canara Bank, Union Bank of India and Bank of India will join their larger state-run peers as investors in the bad bank. ICICI Bank, Axis Bank and Life Insurance Corp of India-owned IDBI Bank are also among the shareholders. State-owned Power Finance Corp and Rural Electrification Corp will also be equal shareholders in the new company.



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Raghuram Rajan’s formula has led to over 50% recovery for ARCs, BFSI News, ET BFSI

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The recovery rate of asset reconstruction companies (ARCs) has been over 50% in the last five years since Raghuram Rajan brought in the ’15:85 structure’ for acquiring non-performing assets from banks.

“From FY16 onwards, recovery has been more than 50% in ARCs, which is much much better than even an IBC. In IBC resolution everyone talks of resolved cases, but 75% cases of IBC are going into liquidation, recovering less than 10 % of loans” says Siby Antony, chairman, ARC Association of India.

In FY2015 Raghuram Rajan brought in the 15:85 structure, under which the cash component ARCs would have to pay to a bank was raised to 15% while the rest was security receipts, from the earlier 5:95 split.

The 5:95 split

“The 5:95 (5% cash and rest SR) split was a very skewed structure in favour of ARCs. It was a blind game ARCs could play,” says Antony.

Under 5:95 structure, ARCs could earn a positive net return just on the basis of management fees, without any value addition by securitisation or asset reconstruction.

The increase of cash proportion to 15% pushed the ARCs to raise their returns through securitisation and asset reconstruction.

The 15:85 structure

“15:85 is an excellent structure. Unless the ARC recovers 130% of the acquisition value, it will not make its return. Even at 100%, ARC will make loss because the management fee of 1-2% doesn’t make any ARR for ARC. Recovery should be over 130% so that 100% of security rights will be redeemed,” Antony said.

Provisioning killed the goose

However, in September 2016, the Reserve Bank of India introduced new regulatory guidelines regarding provisioning. From April 2018 banks have to sell at 90% cash and 10% SRs. If a bank holds more than 10% SR, it had to continue provisioning for the loan which is not even on their books.

“So there was no incentive for them to transfer to ARCs. Now no banks transfer on 15:85 and all deals are on cash,” says Antony.

Cash deals

At such high levels of cash, the market becomes unviable for all but a few. Some ARCs such as Edelweiss, JM Financial that have raised money from Alternative Investment Funds (AIFs) do transactions on a cash basis, but other ARCs have deployed whatever capital they had, and now have none.

The holdings of such AIFs which have the capital to invest in newly-issued security receipts have risen sharply. These funds hunt for viable assets. Vulture funds and AIFs look for 25% plus returns while the ARCs look at 18-20%



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Kotak Special Situations Fund acquires Prius Commercial Projects for ₹450 crore

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Kotak Special Situations Fund (KSSF), which is managed by Kotak Investment Advisors Limited (KIAL), Wednesday. announced that it had acquired Prius Commercial Projects (Prius) under insolvency and bankruptcy code (IBC) for ₹450 crore.

“In an all-cash deal, KSSF led consortium emerged as the successful resolution applicant, with the NCLT, Delhi duly approving its resolution plan,” it said in a statement.

Following the acquisition of Prius, KSSF has now closed its first investment under the IBC platform, it further said, adding that it has been investing from its $ 1 billion fund in a variety of structured investment situations.

Eshwar Karra, CEO, KSSF at KIAL, said, “This investment is in line with our funds objective of acquiring value assets on the IBC platform.”

Prius is engaged in leasing commercial space and owns the building named ‘Prius Platinum’ in Saket, Delhi, with a leasable area of 2.59 lakh square feet.

“The controlling stake held by KSSF provides it a platform to build a portfolio of office assets along the lines of Prius, leveraging on the group’s extensive expertise in real estate as well as a resolution of stressed assets,” the statement said, adding that the investment targets refurbishment and leasing of Prius’ office space.

KSSF’s real estate portfolio management experience will support a professional management team.

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As Covid-led bankruptcies loom, govt readies pre-packaged insolvencies, BFSI News, ET BFSI

Banking & Finance

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The government is likely to bring a pre-packaged insolvency resolution process across the board in light of an anticipated rise in bankruptcies due to the pandemic.

According to reports, the government is likely to start with micro, small and medium enterprises.

As bad loans are feared to top 13.5% of total advances due to the pandemic such a move has become urgent, experts said.

The government has been mulling the introduction of the provision for pre-packaged (pre-pack) corporate insolvency resolution plan wherein a restructuring plan would be agreed upon in advance between the company and its creditors.

In the Budget for 2021-22, Finance Minister Nirmala Sitharaman said the government will introduce alternative methods of debt resolution and a special framework for micro, small and medium enterprises.

What is pre-packaged insolvency?

Under the pre-packaged process, main stakeholders like creditors, shareholders and the existing management or promoter can come together to identify a prospective buyer and negotiate terms of a resolution plan, before submitting it to NCLT for formal approval.

Experts say it will help expedite the resolution process for stressed assets as well as reduce the number of insolvency-related cases before the National Company Law Tribunal (NCLT).

Last year, the corporate affairs ministry sought comments on pre-packaged resolution plans.

The pre-pack process will cut short time spent at the NCLT, and the consequent delay in implementation of a workable resolution plan.

Help for MSMEs

A sub-committee of the insolvency law panel had recommended making available pre-pack for all corporate debtors in a phased manner. It had highlighted its need for micro, small and medium enterprises, which have simpler structures and fewer liabilities than the large corporates.

Cut load, timelines

A pre-packaged insolvency resolution scheme would drastically reduce the timeline for the corporate insolvency resolution process thereby saving time, money and resources.

It would also cut the workload of overburdened NCLT significantly as there would be a reduction in unnecessary pleas from stakeholders during proceedings.

It will, in turn, have a positive effect on the value maximisation for the creditors.

Mounting cases

From December 1, 2016, till the end of September last year, total 4,008 CIRPs (Corporate Insolvency Resolution Processes) have commenced under the IBC.

Out of the total, 473 CIRPs have been closed on appeal or review or settled, 291 have been withdrawn, 1,025 have ended in orders for liquidation and 277 have ended in approval of resolution plans, as per data compiled by the IBBI.

Post the pandemic, there will be an urge to close the pending cases and there will be a significant increase in new stressed cases and introducing the pre-packaged IBC at this time will boost the economy and allow quick closure of the pending and upcoming cases.



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Veena Sivaramakrishnan, BFSI News, ET BFSI

Personal Finance

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The resolution framework for stressed assets has been in the works for sometime from the time of Project Sashakt itself and the AMC-ARC structure has been attractive leading to competition because there is now an expectation that there will be competition in this market so the price discovery would get better because NPAs don’t have a mechanism by which they’re traded.

Veena said, “AIFs coming into fray would allow other players to also enter into this market which is not permitted directly and certainly the first step in the right direction.”

On the framework, she says, “ARC purchases bad debt and looks at recovering directly from the borrower and is fairly limited. With an AMC coming into picture means there’s a specialist in the frame who can provide the know-how on actual resolution and outside IBC.”

An expert AMC will play a role in restructuring an account and therefore arrive at a resolution.

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RBI’s FSDC panel reviews insolvency resolution under IBC

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The Sub-Committee of the Financial Stability and Development Council (FSDC) on Wednesday discussed the scope for improvements in insolvency resolution under the Insolvency and Bankruptcy Code (IBC) and utilisation of data with the Central KYC (know your customer) Records Registry.

The Sub-Committee, chaired by Governor Shaktikanta Das, also discussed changes in the regulatory framework relating to Alternative Investment Funds (AIFs) set up in the International Financial Services Centre (IFSC), among others, the Reserve Bank of India (RBI) said in a statement.

It reviewed the functioning of State Level Coordination Committees (SLCCs) in various states/UTs.

“The regulators reaffirmed their resolve to be alert and watchful of emerging challenges to financial stability,” RBI said in a statement.

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IBC emerges as major mode of NPA recovery in 2019-20

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Non-performing assets (NPAs) recovered by scheduled commercial banks through the Insolvency and Bankruptcy Code (IBC) channel increased to about 61 per cent of the total amount recovered through various channels in 2019-20 against 56 per cent in 2018-19, according to latest Reserve Bank of India (RBI) data.

IBC, under which recovery is incidental to rescue of companies, remained the dominant mode of recovery, according to RBI’s “Report on Trend and Progress of Banking in India 2019-20.”

In absolute terms, of the total amount of Rs 1,72,565 crore recovered through various channels in 2019-20, IBC route accounted for Rs 1,05,773 crore. In 2018-19, of the total recovered amount of Rs 1,18,647 crore, the recovery via IBC channel was Rs 66,440 crore.

“Going forward, insolvency outcomes will hinge around uncertainties relating to Covid-19.

“The government has suspended any fresh initiation of insolvency proceedings in respect of defaults arising during one year commencing March 25, 2020 to shield companies impacted by Covid-19,” RBI said.

SARFAESI channel

The report observed that the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002, (SARFAESI) channel also emerged as a major mode of recovery in terms of the amount recovered as well as the recovery rate, the report said.

Under SARFAESI, Rs 52,563 crore was recovered in 2019-20 against Rs 38,905 crore in 2018-19.

With the applicability of the SARFAESI Act extended to co-operative banks, recovery through this channel is expected to gain further traction, the report said.

Apart from recovery through various resolution mechanisms, banks also clean up balance sheets through sale of NPAs to assets reconstruction companies (ARCs) for a quick exit.

During 2019-20, asset sales by SCBs to ARCs declined which could probably be due to SCBs opting for other resolution channels such as IBC and SARFAESI, RBI said.

The acquisition cost of ARCs as a proportion to the book value of assets declined suggesting lower realisable value of the assets, it added

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