What Ails The Great Indian Asset Sale?

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In September, after the annual ritual of a review meeting with the chiefs of public sector banks, Finance Minister Arun Jaitley said that non-performing assets (NPAs) with these banks were on the decline and ~1.8 trillion worth of recovery of bad loans could happen during fiscal year 2019.

According to him, in the first quarter of the year, the lenders recovered ~365.5 billion. This is 49 per cent higher than the corresponding quarter of the last year. During entire 2018, banks recovered ~745.6 billion. “It’s still early days of the IBC (Insolvency and Bankruptcy Code), but already the impact is clearly visible,” Jaitley said.

It all started with the Reserve Bank of India’s (RBI’s) asset quality review in October 2015. The banks were to clean their books by March 2017. Even as they were grappling with rising bad debts, armed with IBC, the RBI in June 2017 listed 12 defaulters against whom it wanted immediate bankruptcy proceedings to be invoked. This was followed up with another list of 38 defaulters in August 2017.

The first set of “dirty dozen” owns to the banking system ~3.25 trillion, and the second set, ~2.28 trillion — together more than 50 per cent of the pile of bad debt in Indian banking system. Sector-wise, metals account for the biggest chunk with a 37 per cent share, followed by engineering, procurement and construction [EPC] 26 per cent and consumer goods, 12 per cent.

There are many other default cases too which are being tackled at the National Company Law Tribunal (NCLT). Overall, till June 2018, 977 cases have been admitted here. Out of these, 34 have been resolved and 136 cases have gone for liquidation. From resolved cases, the lenders have recovered 55.49 per cent or ~478 billion out of ~861.6 billion debt; the liquidation value is far lower, less than 25 per cent.

These figures relate to all cases. Let’s take a closer look at 40 big defaulters. Out of the first set of 12 cases, against which the bankruptcy proceedings were initiated between May and August 2017, only four have been resolved — Bhushan Steel Ltd, Electrosteel Steels Ltd, Amtek Auto Ltd and Monnet Ispat & Energy Ltd. The case against Alok Industries has been resolved but it is awaiting the NCLT approval. Jyoti Structures Ltd could have gone for liquidation but that has been stayed by NCLT. All other cases have been continuing.

What has been the rate of recovery? The best case is Bhushan Steel — ~355.7 billion recovery against ~560 billion debt — 64 per cent. Electrosteel Steels comes next (40 per cent), followed by Amtek Auto (36 per cent) and Monnet Ispat (24 per cent). As and when NCLT gives its nod, lenders will recover 17 per cent (~50 billion out of ~295 billion) from Alok Industries.

Of the second set of 28 cases, two biggest cases are Videocon Industries Ltd (~571.6 billion) and Jai Prakash Associates Ltd (~450.8 billion). From this list, only one case has been resolved — Orchid Pharma Ltd (~10 billion out of ~23.9 billion). While one is heading towards liquidation (Shakti Bhog Foods Ltd), a few have been admitted to NCLT but many others are yet to get there.

The average time taken to resolve the five cases from the two lists is 348 days. And those which are still being tackled at the NCLT, at least 430 days have passed since their admission.

Typically, after a case is filed, it takes 30 days to be admitted into NCLT. The platform should find a solution within 180 days; but can take another 90 days, depending on the complexity of a case. So, a case should be resolved within 270 days. Then, why this inordinate delay? What is derailing the great Indian asset sale?

Set up in June 2016, the NCLT arbitrates cases related to company law board as well. It has only 13 benches. Even after adding another 10 which it plans, it won’t have the bandwidth to tackle so many defaulters. Any default above ~100,000 can be dragged into NCLT by financial creditors, operational creditors and even the corporate borrowers.

Once a defaulter is identified, a committee of the creditors (COC) appoints one resolution professional to supervise the case. At the next stage, the information memorandum is prepared and the so-called expression of interest is sought from the prospective bidders. After checking the eligibility of the bidders and evaluating the bids, the COC goes to NCLT.

The problem starts here. Even the losers can make fresh bids and new bidders join the fray. Allowing new bids after sealing the process hurts the sanctity of the exercise and leads to delays. Then, why is this allowed? Well, since the objective is getting the best price, why not? I don’t have the right answer. Also, certain assets may not get any bid at all.

Besides, nothing prevents the defaulters to move court. For instance, Jai Balaji Industries Ltd and Anrak Aluminium Ltd — with exposures of ~36 billion and ~35 billion, respectively — have moved different high courts. One court disallowed Jai Balaji’s admission into NCLT while another ruled in favour of the one-time settlement scheme being implemented instead of moving ahead with NCLT for Anrak Aluminium.

The Supreme Court has also stayed the insolvency proceedings against at least 70 defaulters in the power, sugar, textiles and shipping industries. At least four power companies had moved different high courts, seeking relief from insolvency proceedings and India’s apex court has transferred all pleas to itself. The hearing on these cases will start on November 11.

Finally, the EPC companies have no assets and hence there is hardly any option before the lenders but liquidation. Similarly, a power project without fuel supply agreement is a dud asset. There are other twists, too. The steel sector is doing well but not all promoters of steel plants want the lenders to smell money while the NCLT process is on. They are delaying the process to enjoy the “leakage” as long as possible before losing the assets.

Japan, which introduced the bankruptcy law in 2004, takes six months to settle a case and the recovery rate is close to 93 per cent. For UK, which introduced it in 2002, the recovery rate is 88.6 per cent and settlement within a year, while US, where insolvency law is 40 years old, takes 18 months to settle a case at a recovery rate of 80.4 per cent. It’s still early days in India but if we want speedy recovery, the banks must use the threat of NCLT but settle the score outside it. Delay erodes the value of assets.

Post Script: As I write this column over the weekend, ArcelorMittal Netherlands NV emerges as the highest bidder for Essar Steel and Anil Agarwal-owned Vedanta Resources Plc is ready to put in a higher bid.

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