Lenders face 95% haircut as Tecpro Systems' debt mounts to Rs 75 billion

Tecpro promoters face action under Section 66 of IBC for siphoning funds

The resolution of Rs 75-billion debt of Tecpro Systems, a material handling company, submitted to the National Company Law Tribunal (NCLT) early this month will test the insolvency process if lenders have to take a huge haircut because promoters have walked away with funds prior to bankruptcy filing. 

On May 3, the resolution professional (RP) initiated action under Section 66 and section 67 of the Insolvency and Bankruptcy Code (IBC) at the NCLT against Tecpro’s erstwhile promoters for siphoning off funds from the company. 

Under Section 66 and 67 of the IBC, a promoter or a director can be held liable if any of the borrower’s business was carried on with the intent to defraud creditors and pay up.

A forensic audit by management consultancy firm Ernst & Young (EY) on Tecpro Systems, which was attached with the RP’s application to NCLT, found evidence of siphoning of funds from the company.

The EY report said that the company made payments for raw materials that were never delivered. These suppliers were related or controlled by promoters or their associates, it added.

Tecpro, which came out with its initial public offering (IPO) at Rs 355 per share in 2010 was traded on the bourses till 2016.

The company started defaulting from 2014 on its loans taken from public sector banks, which, in turn, sold their loans to Edelweiss Asset Reconstruction Company at a steep discount. Edelweiss ARC moved the National Corporate Law Tribunal (NCLT) in August last year against the company to recover the loans.

Lenders are looking at the prospects of a 95 per cent haircut on their exposure. 

At the same time, lenders also sought a forensic audit that was conducted by management firm, EY. The forensic report found the promoters have siphoned off from the company by submitting fake invoices and making forged bills.

An Edelweiss spokesperson declined to comment, while e-mails sent to Tecpro remained unanswered.

Early this month, the committee of creditors comprising mainly of Edelweiss ARC with 85 per cent of votes, Standard Chartered Bank and Vijaya Bank have approved a plan to sell the company. The highest bidder – Kridhan Infrastructure Pvt Ltd promised an upfront payment of Rs 500 million in the company and agreed to repay the company’s debt of Rs 4 billion to be paid in three years. The Kridhan Infrastructure plan wanted immunity to the company, directors and employees from any cheque bouncing cases. The CoC agreed to give immunity only to the company but not to others.

Lenders are a worried lot on the extent of the haircut. “With the forensic audit showing siphoning off of funds, then under the IBC code, the RP will take action. But it would take a couple of Supreme Court judgments to put the IBC house in order,” said the head of an asset reconstruction company.

This is the not the first case where the Indian lenders would lose money. According to estimates made by analysts, lenders will have to take between 50 per cent to 75 per cent haircut in their exposure to top 40 companies identified by the Reserve Bank of India (RBI) for referral to the NCLT.