State Bank may seek RBI approval for DHFL insolvency proceedings

Within days of the Section 227 of the Insolvency and Bankruptcy Code (IBC) being introduced, banks are deliberating using this to resolve loans to stressed non-banking finance companies (NBFCs).

“State Bank of India (SBI), which has the largest exposure of over Rs 9,000 crore through term loans to Dewan Housing Finance (DHFL), may consider the IBC route. The bank is waiting for the Reserve Bank of India (RBI) to notify which companies can be moved to courts through this mechanism,” said a source.

Sources also said the RBI was in the process of formulating guidelines to invoke insolvency proceedings for NBFCs and was expected to issue the notification soon.

Banks led by SBI may make a representation to the RBI, stating the current resolution process did not find much success and they would like to opt for resolution under the IBC.

“The RBI, if it finds the petition valid, will invoke proceedings,” said the source. As per Section 227 of the IBC, only the appropriate regulator can initiate insolvency proceedings against financial service providers.

SBI is being advised by law firm Cyril Amarchand Mangaldas  on invoking the IBC for DHFL.

Upon admission of the case at the National Company Law Tribunal (NCLT), the RBI will appoint an administrator and is also expected to set up a three-member advisory committee, which will include members of key lenders to DHFL.

Lenders are working on a new resolution plan once the IBC proceedings against DHFL are admitted in the NCLT. Under this plan, banks may convert a part of their loans to equity. Lenders also plan to get private equity investors, who will bring fresh capital.

Banks would own 25 per cent equity, while the PE players would have a stake of 26 per cent of the augmented capital.

“Since holding a 51 per cent stake in the company required a lot of regulatory go-aheads, banks have decided to restrict the quantum of debt conversion to 25 per cent,” said a source in the banking sector.

He added, “This time, banks will enter into back-to-back agreements with the interested investors to buy out their shares within 12-18 months of conversion. Banks also reserve the right to sell their stake in the open market if the investor fails to do so.”

Sources said PE investors such as AION Capital and Cerberus Capital, who had earlier evinced interest in DHFL, are in talks with banks again.

“Since the investment will happen through the IBC route, investors seem more comfortable buying stake in DHFL. This would shield them from litigation in future,” said a source.

“A few PE investors new to the NBFC sector are also showing interest,” he added.

However, since the assets of DHFL cannot be restructured or reorganised immediately, investors will buy stake in the company in totality — that is including retail and wholesale assets.

“It is possible that two PE firms may buy 10–16 per cent stake each in the business,” said a source.