What ails the great Indian asset sale?

For speedy recovery, banks must use the threat of NCLT but settle the score outside it

In September, after the annual review meeting with the chiefs of public sector banks, Finance Minister Arun Jaitley said that non-performing assets with these banks were on the decline and Rs 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 Rs 365.5 billion. This is 49 per cent higher than the corresponding quarter of the last year. During entire 2018, banks recovered Rs 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 bankruptcy proceedings to be invoked. Then there was another list of 38 defaulters in August 2017. 

The first set of “dirty dozen” owes to the banking system Rs 3.25 trillion, and the second set, Rs 2.28 trillion — together more than 50 per cent of the pile of bad debt in Indian banking system. 

Overall, till June 2018, 977 cases have been admitted at the National Company Law Tribunal (NCLT). Out of these, 34 have been resolved and 136 have gone for liquidation. From resolved cases, the lenders have recovered 55.49 per cent or Rs 478 billion out of Rs 861.6 billion debt; the liquidation value is less than 25 per cent.

Even as the banks were grappling with rising bad debts, the RBI in June 2017 listed 12 defaulters against whom it wanted bankruptcy proceedings to be invoked

These figures relate to all cases. Let’s take a closer look at 40 big defaulters. Out of the first 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 — Rs 355.7 billion recovery against Rs 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 of Rs 50 billion from Alok Industries.

Of the second set, two biggest cases are Videocon Industries Ltd (Rs 571.6 billion) and Jai Prakash Associates Ltd (Rs 450.8 billion). From this list, only one case has been resolved — Orchid Pharma Ltd (Rs 10 billion out of Rs 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 still being tackled at the NCLT, at least 430 days have passed since their admission.

Typically, it takes 30 days to be admitted into NCLT. The platform is to 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 13 benches. Even after adding another 10 which it plans, it just can’t tackle so many defaulters. Any default above Rs 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. Then, 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 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 have moved different high courts. One court disallowed Jai Balaji’s admission into NCLT while another ruled in favour of a one-time settlement 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 after four power companies had moved different high courts, seeking relief. The hearing on these cases will start on November 11.

Finally, the engineering, procurement and construction 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 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 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 for speedy recovery, the banks must use the threat of NCLT and settle the score outside it as delay erodes the value of assets. 

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

The columnist, a consulting editor with Business Standard, is an author and adviser to Bandhan Bank Ltd. 

Twitter: @tamalbandyo