A new dawn in India’s Ailing Banking Sector? A quick fix to broken banks? A game changer? Well, these were just a few phrases that described the much celebrated Insolvency & Bankruptcy code (IBC) that was passed by parliament on 11 May 2016, received Presidential assent on 28 May 2016 and was notified in the official gazette on the same day.

Understanding IBC

The value of the firm is a summation of Market Value of its debt & equity. When the value of firm drops to the value of debt, equity is wiped out. With equity out of the equation, it is only debtors or creditors who can have a claim on the asset of the company. The bankruptcy process, which IBC seeks to address, is all about how creditor can maximize their claim on a firm that has gone bankrupt.

Need for IBC

India’s banking industry is in the throes of crisis with Non Performing Assets (NPAs) piling in the bank, acting as a brake on the growth prospect of world’s fastest growing major economy. NPAs – loan on which debtors have stopped paying either interest or principal stood at 10.2% in September 2017. At 10.2%, India has been ranked fifth on the list of countries with highest NPAs just behind distressed PIIGS (Portugal, Italy, Ireland, Greece, Spain) excluding Spain that is ranked at 7th spot.

To deal with rising Bad Debts, RBI and the Government laid the foundation of the IBC code, 2016 that came into effect from Dec 2016 which aims to fast track the bad loan resolution process

IBC Mechanism

Corporate Insolvency Resolution Process

• Application on default – Any financial or operational creditor(s) can apply for insolvency on default of debt or interest payment.
• Appointment of IP – IP to be appointed by the regulator and approved by the creditor committee. IP will take over the running of the Company.
• Moratorium period – Adjudication authority will declare a moratorium period during which no action can be taken against the company or the assets. The Key focus will be on running the Company on a going concern basis as well as preparing a resolution plan.
• Credit committee – A credit committee of creditors will be constituted. Each creditor shall vote in accordance with voting share assigned, if 75% of creditors approve the resolution plan same needs to be implemented.

Story so Far

With over a year after the IBC, 2016, was put in place, more than 450 cases has been admitted by the National Company Law Tribunal (NCLT) under the IBC, with most experts closely eyeing the outcome of dirty dozen which is due between January and March to determine the success of NCLT judgments.

Dirty Dozen

On June 2017, Reserve Bank of India said its internal advisory committee (IAC) had identified 12 accounts, which account for 25% of NPAs of the Indian banking system for immediate resolution under the IBC.

The gross bad debt in the banking system as of March was INR 7.11 lakh crore, which means the 12 accounts contributed around INR1.78 lakh crore.

The 12 accounts are Essar Steel, Bhushan Steel, Bhushan Power, Alok Industries, Electrosteel Steels, JP Infra, Lanco Infratech, Monnet Ispat, Jyoti Structures, ABG Shipyard, Amtek Auto and Era Infra.

Additionally, lenders are also set to file the RBI’s second list with nearly 28-30 accounts to the NCLTs with the December deadline. This also requires banks to make higher provisioning towards these accounts further denting their balance sheet and profitability.

IBC Amendments

The IBC (Amendment) Bill, 2017, seeks to debar willful defaulters and existing promoters from bidding for stressed assets for companies undergoing insolvency proceedings. The idea being to stop willful promoters to buy their own companies at a discount without having to repay the debt.

PE Playground

With stressed assets worth 2 Lac crore up for grabs, Private Equity players around the world are keenly watching developments concerning stressed asset. Some of the players that have shown keen interest include London-based Arcelor Mittal, Brookfields, Korea’s POSCO, Blackstone, TPG Capital and domestic biggies like the Tata Group, Kotak Group, a Mumbai-based Shapoorji Pallonji Group, Ajay Piramal-controlled Piramal Enterprises and Sajjan Jindal’s JSW Group.

Issues Concerning Resolution

The banks’ biggest challenge is to come up with a realistic calculation of how much the assets are worth. For example, the steel company owes banks INR 44,000 crore and it is anybody’s guess how much it would be valued at now. They are in a catch 22 situation wherein if they manage to get a buyer, the haircut could be enormous. If they don’t, the company goes into liquidation, which leaves them with virtually nothing

However, if optimism is the way to go, for the first time in decades, there would be a level playing field at the negotiating table between bankers and borrowers as defaulter stand to lose their crown jewels — howsoever faded they might be — if they do not cease to act irresponsibly. As Uday Kotak points out “For the first time, founders fear losing control of the company if dues are not paid,”