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Nachiket Kelkar
Nachiket Kelkar

BAD LOANS

Following IBC norms, banks set to refer more defaulters to NCLT

Reserve Bank of India [File] Representative image | REUTERS

At a time when several large default cases are being fought in the various benches of the National Company Law Tribunal (NCLT), lenders are getting ready to initiate insolvency proceedings against a fresh set of defaulters.

The RBI had first sent a list of 12 large defaulters lenders in June and subsequently, a second list of 28 defaulters was sent late August. These 28 companies account for around Rs 1.5 lakh crore of bad loans in the system. The central bank had set a deadline of December 13 for banks to find a resolution for these accounts or else, insolvency and bankruptcy proceedings would have to be initiated against them.

The second list of accounts includes Castex Technologies, IVRCL, Orchid Pharma, Soma Enterprises, SEL Manufacturing, Jaiprakash Associates, Anrak Aluminium, Jayaswal Neco Industries, Ruchi Soya Industries, Monnet Power, Jai Balaji Industries, and East Coast Energy among others.

Of the 28 accounts, almost 22-23 are likely to be referred to the NCLT, with no resolution in sight.

A news agency quoting an unnamed banker said that except for Anrak Aluminium, Jayaswal Neco, Soma Enterprises and Jaiprakash Associates, the others would be taken to the NCLT.

Jayaswal Neco has already been undergoing a restructuring and the company's board this week approved issue of equity shares on a preferential basis to lenders under the debt restructuring plan.

Jaiprakash Associates too is not being taken to the NCLT since it has already undertaken several initiatives to reduce its debt, and has sold its cement assets this year.

Of the original list of 12 large accounts, which accounted for a quarter of the total bad loans in the system, 11 cases are already under the NCLT.

The decision to initiate action against more accounts comes at a time banks are under pressure to clean up their bank balance sheets. The total non-performing assets in the system are estimated to be over Rs 8 lakh crore.

RBI had asked banks to make higher provisions to the accounts that would be referred under the IBC (Insolvency and Bankruptcy Code) and wants banks to make extensive use of the IBC in future.

“Going forward, the Reserve Bank hopes that banks utilise the IBC extensively and file for insolvency proceedings on their own without waiting for regulatory directions...Once a default happens, the IBC allows for filing for insolvency proceedings, time-bound restructuring, and failing that, liquidation. This would provide the sanctity that the payment ‘due date’ deserves and improve credit discipline all around, from bank supply as well as borrower demand standpoints, as borrowers might lose control in IBC to competing bidders,” Viral Acharya, deputy governor of RBI said in a recent speech.

Government, bankers and experts, meanwhile remain divided on whether existing promoters should be allowed to re-bid for some of the assets that are going under the hammer once the IBC process has been initiated.

The cabinet last month approved promulgation of an ordinance to amend the IBC and bar wilful defaulters from buying back their stressed assets.

Some experts feel that genuine promoters, who may have only defaulted due to business conditions, should be allowed to bid again. There is also an argument that the recent amendment to the IBC will also depress valuations.

“Lets look at genuine promoters...If you have a promoter backed by a large private equity firm, they would have done the diligence, they won't have a fraud promoter to back. I think, such cases, where there are small promoters or small scale industries, you have to make some provisions, so that it can go ahead,” Ajay Piramal, chairman of Piramal Enterprises, said at an event organised by the National Stock Exchange and NYU late on Thursday.

Siby Antony, MD of Edelweiss Asset Reconstruction Company said while it was fine to ban wilful defaulters, decision about whether existing promoters could bid again for their assets, should be best left to the committee of creditors.

M.S. Sahoo, chairman of The Insolvency and Bankruptcy Board of India, however, begs to differ. He said, that the amendment did not debate on promoters versus non-promoters, but the idea was to get more bidders who were not tainted.

He says that the focus should now be on how a market can be created so that more people can participate and where it will become easy for a resolution professional to raise interim finance to keep the company going and then look at the best way for liquidation of assets to get value.

“All the changes that have been made (to the IBC) in recent past, including ordinance, is only for the purpose of maximising the value of assets of the corporate debtor. The objective is that we want the corporate debtor, if there is some enterprise value, which is higher than the liquidation value, let us make all possible efforts to resurrect it. That can happen only if we can have the right kind of people, who can be entrusted with a distressed corporate entity for revival,” he said.

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