India's Bankruptcy Code under test in Essar Steel case

Wednesday 03rd April 2019 05:51 EDT

Bankruptcy Code was introduced in India for the early realisation of non-performing assets (NPAs), recovery of bank loans worth £18 billion and resolution of big-ticket cases like Essar Steel. Errant debtors have for years been on the look out for ways to undermine creditor protection, but when lenders begin to make a mockery of a fledgling insolvency law, nobody can save it. India's two-year old bankruptcy regime is now bordering on mockery by the strain of resolving the Essar Steel India Ltd case. However, the Finance Ministry remains confident that the target could be achieved as the National Company Law Tribunal (NCLT) locked down on the sale of the Essar company to ArcelorMittal for £4.2 billion.

A source from the Finance Ministry said public sector banks (PSBs) have recovered close to £13.3 billion by the third week of March, leaving a whopping gap of £4.7 billion in closing this year's target. While achievement of £18 billion mainly leaned on closing of the Essar Steel insolvency case before March 31, distribution of the funds to financial creditors has not taken place as operational creditors have taken up the issue of their dues in the appellate tribunal (NCLAT).

The tribunal had earlier directed the Essar Steel committee of Creditors (CoC) to reconsider distribution of £4.2 billion as announced by NCLT Ahmedabad. The latter had suggested a 85:15 distribution between the financial and operational creditors as opposed to the 90:10 ratio as proposed in the resolution plan. Last week, the NCLAT was informed that a decision by the CoC on the issue of whether StanChart, an unsecured financial creditor which had moved the NCLAT against the resolution distribution formulae, should get higher payout for its dues from Essar Steel is currently under review. Next hearing on the matter at NCLAT has been adjourned to to April 9.

Just like every other billionaire business-maker, the famous Ruia brothers have did everything to make sure their prized assets remain within the family despite them owing Rs 508 billion to financial creditors in unpaid dues. While their case was almost closed with lenders accepting ArcelorMittal's Rs 420 billion bid for the steel plant, an unexpected bump on the road emerged with the State Bank of India (SBI) putting its entire Rs 154 billion exposure on the block. SBI has now said it would accept over Rs 96 billion from loan buyers who can then collect Rs 113 billion from ArcelorMittal in the future.

India's paradoxical Bankruptcy Code

Indian laws have the characteristics of both, a mule and a tortoise. The Indian Bankruptcy Code (IBC) was legislated in December 2016, brought in as a panacea for banks' chronic NPA problem. While it did ride in like a knight in shining armour, it has unfortunately, failed to live up to its promises. "The essence of the IBC is speed. The bankruptcy code mandates a 270-day deadline for resolving insolvency cases. But the IBC had not accounted for the ingenuity – more accurately, cussedness – of Indian promoters,” an expert said.

The IBC was brought in to take the NPA crisis with its horns. As huge bank debts kept on piling by Indian corporates, lax rules of the Reserve Bank of India (RBI) did little to no help by keeping most of them off bank balance sheets. Complicit bank managements rolled over bad debts to keep NPAs artifically low. The toxic cycle, as described by the expert in an article, was broken in 2015 when the RBI tightened its belt and introduced strict new rules to recognise bad loans. In the duration of an year, NPAs shot up as banks were forced to clean up their balance sheets.

The IBC was conceived to stop promoters treating bank loans cavalierly. Under the code, promoters stood to lose their companies if they didn't pay up. While it has helped resolve several cases even before the code is set into action as promoters driven by fear of losing their firms settled out of court with banks accepting varying degrees of haircuts.

However, as the IBC catches on, poor infrastructure, legal speedbreakers, and paucity of NCLT and NCLAT threaten to damage what was till recently regarded as one of the most progressive financial legislations of the NDA government. It is now up to the stakeholder to protect the integrity of the code. If delays caused by artificial legal hurdles from defaulting promoters or intervention by statutory authorities occur, the very purpose of the IBC will be defeated.

Lenders, creditors, resolution professionals, promoters, and NCLT benches have milked the banking system for too long. It is with arrival of the mere notion of the IBC that capricious borrowing stopped and repayments surged as promoters hustled to retain control of their companies.

Essar Steel is a test case for the new insolvency law: Lakshmi Mittal

The world's largest steel company, ArcelorMittal has done everything in its capacity to acquire Essar Steel, as it fights with the only other contender, Numetal Mauritius- a consortium promoted by Russia's VTB Banks. Bidding on the Ruia's firm has raised several eyebrows on the insolvency process, including that of the definition of a promoter who has defaulted. Lakshmi Mittal said, "Each acquisition has its own unique features, and the same is true with Essar Steel. At a simplistic level, this is the sale of a sizeable integrated asset that requires investment and a dedicated plan to improve performance. On that basis, there are parallels with other similar sized assets we have acquired in the past. But what is remarkable here is that this is a test case for the new insolvency case."

He added, "And as we have seen, the path so far is not straightforward as the previous owners are not willing to give up their assets readily. Many are watching to see if the IBC will achieve its objectives of delivering a fair return to creditors and a long-term custodian for the asset that defaulted under its previous owners, in a timely manner. We must have confidence that ultimately, the IBC will achieve its aims and the strongest bidders will succeed, in the best interests of Essar Steel."

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