12 March 2019: Lenders of Reliance Communications (RCom) Tuesday contended before the NCLAT that they have the first right over Rs 260 crore, which the debt-ridden company has received as the income tax refund. The SBI along with other members of Joint Lenders’ Forum (JLF) said that under the RBI guidelines, they have the right over the retention and trust account in which the refunds have been deposited.
A two-member bench headed by Chairman Justice S J Mukhopadhaya will continue the hearing tomorrow in the matter.
Senior advocate Neeraj Kishan Kaul, representing the SBI, submitted before the tribunal that JLF could not be blamed for not recovering Rs 37,000 crore from sales of assets of RCom.
“Settlement did not fail because of JLF. It failed because Jio declined to pay RCom’s past debt,” he said.
Lenders further said that the retention and trust account had been set up before the insolvency process against RCom, and thus it has to be kept out of the current proceedings.
“The retention and trust account has separate Reserve Bank of India (RBI) guideline which says that no third party encumbrances can be created. RCom cannot saddle the responsibility of paying Ericsson on the banks,” he said.
On Monday, National Company Law Appellate Tribunal (NCLAT) had pulled up the SBI, the lead lender of debt-ridden Reliance Communications, along with others for giving a ‘false impression’ to monetise Rs 37,000 crore from asset sales of the telecom company to Reliance Jio.
The NCLAT was hearing RCom’s plea, which has approached the appellate tribunal, seeking waiver over the moratorium placed by it on February 4.
However, its financial creditors are opposing its plea to release the Income tax refunds to clear dues of Ericsson, to whom the company has to pay Rs 550 crore.
On February 20, the Supreme Court held RCom chairman Anil Ambani along with two others guilty of contempt of court for wilfully violating its order by not paying Rs 550-crore dues to telecom equipment maker Ericsson.
The apex court had said they faced a three-month jail term if remaining Rs 453 crore was not paid to the telecom equipment maker in four weeks.
Earlier on February 4, the appellate tribunal had said that until further orders of the NCLAT or the Supreme Court, no one can sell, alienate, or create third party rights over RCom’s assets.
12 March 2019: State-owned NHPC Limited has bagged the responsibility to complete Teesta VI hydropower project years after the initial builder – Lanco Teesta Hydro Power Ltd (LTHPL) – went into insolvency and the 500 mw project hit a roadblock.
The Cabinet Committee on Economic Affairs (CCEA) headed by the Prime Minister has approved the investment sanction for acquisition of LTHPL and execution of the remaining work by NHPC.
“It is a big responsibility that we are happy to shoulder. With only around 30% job done, the project will now require new planning and execution including situation analysis and fresh tendering,” said Debajit Chattopadhyay, executive director, NHPC.
According to officials, the project will be implemented at an estimated cost of Rs 5,748.04 crore, which includes the bid amount of Rs 907 crore for acquisition of LTHPL.
The run of the river project in Sirwani village is aimed at utilising the power potential of Teesta river basin. It envisages construction of a 26.5 metre high barrage across the river, two horse shoe shape head race tunnels of 9.8 metre diameter and 13.76 km length, and an underground power house with four generation units of 125 mw each.
The project is expected to generate 2,400 million units of power in a year when the annual generation has the probability of being equal to or exceed 90 per cent of the time on annual basis during the expected period of operation of the scheme. While 12% of this output will go to the host state Sikkim as royalty, the rest will be taken to the national power field.
NHPC has set a deadline of five years for the completion of project. “We do not apprehend any chance of cost or time overrun on this. But geological surprises and natural calamities may alter the scenario,” said Chattopadhyay.
12 March 2019: Last week lenders to engineering and construction company Hindustan Construction Company Ltd. approved a resolution plan that restructures over Rs 4,000 crore of its total debt. Some portion of that debt will be converted into long term equity-like instruments leaving the company with a serviceable amount of loans.
More interesting though is a new feature in the resolution plan. HCC has over Rs 10,000 crore in claims that are currently in arbitration. These are claims for project work undertaken but not paid for, mostly by central or state government agencies that commission infrastructure projects. Contractual disputes or project delays are often at the center of such claims.
HCC’s resolution plan involves the sale of claims worth nearly Rs 10,000 crore to an investor, said three people involved in the process. They spoke under the condition of anonymity. According to its annual report for the financial year ended March 2018, HCC had secured arbitration awards of Rs 4,823 crore, of which, the company had already collected Rs 1,416 crore. Further, about Rs 4,915 crore worth claims were in various stages of arbitration.
As per the plan HCC will hive off the claims into a separate entity. According to the three people cited above, bidders may choose to bid for the entire portfolio of claims or select the claims they want to buy. This will allow HCC to monetise pending claims, reduce debt and focus on its core business.
HCC didn’t respond to an email sent by BloombergQuint on Monday.
Litigation Funding: A Way Out For Infrastructure Developers?
Litigation financing – in which a third party/investor finances a litigation in exchange for a portion of the settlement or monetary award – is a common practice in developed markets. Investors hire lawyers who assess the legal viability of the case/claim and accordingly arrive at a funding agreement with the litigant.
New in India, it is now becoming a preferred route for tackling stress in engineering and construction companies burdened by such claims. With capital tied up in such claims infrastructure developers often have to resort to additional debt to work on new projects. Many in the road, power and port sectors are burdened by thousands of crore rupees in claims, some even driven to insolvency on account of unending arbitrations.
Investors interested in buying such claims range from distressed asset funds to private equity investors. Depending on the claim the rate of return could be as high as 20-25 percent, one of the people cited above said.
“There is considerable interest from international funds for such opportunities in India, especially in cases where the litigation is in advanced stages,” said Babu Sivaprakasam, partner at the law firm Economic Laws Practice. “However, getting the right kind of opportunities and coming to a consensus on pricing is always a challenge.”
HCC isn’t the first local company to experiment with litigation funding.
In November 2017, stressed construction company Patel Engineering Ltd. transferred or assigned such claims and real estate rights of about Rs 2,000 crore to a special purpose vehicle. It sold 51 percent of the SPV to private equity firm Eight Capital, according to the company’s annual report. In exchange, the private equity firm issued non-convertible debentures to Patel Engineering’s lenders, with a repayment period of six years and an annual return of 0.01 percent, according to one person close to the deal. The debentures would be redeemed once the claims were paid.
According to Ravi Chachra, chief investment officer and managing director, Eight Capital, funds typically prefer claims where the counterparty is the central government or companies promoted by it, since there is certainty that the claims would be honoured at the end of the legal process.
Chachra did not confirm the financing structure in the Patel Engineering deal, citing proprietary formulas. Each fund creates its own structure when purchasing the claims, he said.
In the case of Era Infra Engineering Ltd., currently under insolvency resolution process, the committee of creditors is considering resolution plans that involve monetisation of arbitration claims, as recommended by the resolution professional Rajeev Chakraborty. Era Infra is one of the 12 large corporate accounts which were referred to the insolvency and bankruptcy process in June 2017.
Litigation Funding: Potential?
As mentioned, several engineering and construction companies and infrastructure developers have thousands of crores stuck in arbitration claims, often against state and central government or their agencies. In 2016, the union government’s Cabinet Committee on Economic Affairs estimated Rs 70,000 crore tied up in arbitration.
“The average settlement time for claims is estimated at more than seven years,” the CCEA statement said.
Often arbitration awards in favour of the companies are contested in courts, leading the CCEA to mandate that once a claim under arbitration is awarded to a company, where the government is counterparty, it must pay at least 75 percent of the claim, even if it intends to challenge the award in higher courts.
But that hasn’t been fully implemented say several companies. And the claims have only mounted.
For instance, the National Highways Authority of India stated in its FY2017 annual report that 125 arbitration and 100 court cases, with claims over Rs 42,000 crore and 2.6 million euros were pending against the authority. Similarly, NTPC Ltd. reported Rs 12,533 crore worth claims pending to be paid to companies that have raised them, as on March 31, 2018.
“There is a need for such litigation financing structures for infrastructure companies which are dependent heavily on payments from counterparties such as the government and PSUs, to run their operations,” said Sivaprakasam of Economic Laws Practice. “Litigation takes up a lot of their resources and time, so if a strategic investor comes and takes it off their plate, they can focus on their core construction business.”
12 March 2019: The merger of loss-making telecom firm Tata Teleservices (TTSL) with Bharti Airtel, which got the NCLT’s green signal in January, has one more hurdle to cross before it is cleared by the Department of Telecom (DoT). And this one will pinch since it’s a bill for unpaid dues of around Rs 15,000 crore.
“Airtel and TTSL have to pay around Rs 10,000 crore and Rs 2,800 crore, respectively, as SUC [spectrum usage charge],” a DoT official told The Economic Times. “Then there is another Rs 2,000 crore of OTSC [one-time spectrum charge] that transferee firm Airtel will have to pay in the form of bank guarantees to the government.”
For instance, Vodafone had to pay OTSC of around Rs 3,900 crore for completing merger with Idea Cellular. The DoT had also asked Idea Cellular to furnish a combined bank guarantee of Rs 3,342 crore before taking merger on record.
In SUC and OTSC, licence fees will get also tacked on and this will be another big amount that the telcos have to cough up. The buzz is that demand letter will be sent out shortly.
In October 2017, Sunil Mittal-led Airtel and TTSL announced their merger on a no-debt, no-cash basis. In other words, Airtel would not take over TTSL’s around Rs 40,000 crore debt and would neither pay any cash. However, according to a statement, as part of the agreement Airtel would assume a small portion of the unpaid spectrum liability of TTSL towards DoT, which would be paid on deferred basis. According to the daily, TTSL is expected to bankroll most of the dues even if Airtel formally assumes the responsibility to clear the dues.
The sources added that, going by historical precedence, DoT is expecting Airtel and TTSL to legally challenge the OTSC charges.
Last month, telecom tribunal TDSAT had quashed a government decision to charge for additional spectrum allocated to RCom and had asked DoT to return bank guarantees worth Rs 2,000 crore to the Anil Ambani-led firm.
The DoT and telecom firms have long been at loggerheads over the scope and definition of Adjusted Gross Revenue, on which licence fees and other charges like SUC – two key revenue streams for the government – are calculated. Telcos have historically stymied DoT’s efforts to recover such dues on the grounds that the definition of AGR was still disputed in court.
Typically, a telecom operator shells out 8% of AGR as licence fee and around 5% as SUC. As for OTSC dues, as per DoT rules, telcos have to pay for holding spectrum above 6.2 MHz/circle retrospectively from July 2008 to end-December 2012, based on market determined price decided in auction. Besides, for airwave holdings beyond 4.4 MHz/circle, the telcos would have to pay for the remaining period of their licences starting January 1, 2013.
Last September, the telecom department moved the Supreme Court for approval to secure dues worth almost Rs 33,000 crore from all operators. This development came against the backdrop of lower revenue from licence fees and SUC for the government. Union telecom minister Manoj Sinha informed the Parliament in February that the government’s revenue mop-up from the telecom sector fell by about 22% in the 2017-18 fiscal.
Earlier this month, Vodafone Idea, Bharti Airtel and Reliance Jio paid the government about Rs 6,000 crore in spectrum dues but a huge amount is still stuck in legal disputes between telcos and DoT. Hence, the rulings of the various courts and tribunals will have a bearing on the DoT’s future earnings.
12 March 2019: State-owned Bank of Maharashtra has put on sale the assets of Unity Appliances Ltd, a unit backed by Videocon Industries, at SIPCOT industrial estate in Shivaganga, Tamil Nadu, for defaulting on payments.
The outstanding dues of the unit are over Rs 153 crore, plus interest, from January 5, 2018. Unity is involved in manufacturing of air conditioners and refrigerators.
The electronic auction for land and machinery is slated for March 30, 2019 with a reserve price of Rs 42.34 crore for land and Rs 72.82 crore for plant and machinery.
The lenders are auctioning the electronics business estimated to be worth $2 billion.
12 March 2019: The National Company Law Appellate Tribunal (NCLAT) on Monday admonished State Bank of India (SBI), saying the lender had given a false impression that the RCom-RJio deal would fetch about `37,000 crore.
The NCLAT bench wondered why should there not be proceedings against the lender for painting a rosy picture of RCom. “SBI created false impression, gave a rosy picture before us,” the two-member NCLAT bench, headed by chairperson SJ Mukhopadhyay observed.
The appellate tribunal said the country’s largest lender had “clapped with RCom” or, in other words, worked with the telecom player.
“You (SBI) have failed. JLF has failed. No sale took place. You clapped with RCom and claimed that you would recover around Rs 37,000 crore from sale to Jio. You cited losses of crores per day. You failed and now will seek to recover `260 crore,” the bench observed.
The appellate tribunal pulled up SBI for not releasing the Rs 260-crore income tax returns lying with it, which could be used by RCom to pay Swedish telecom equipment maker Ericsson. The bench was hearing a plea by RCom seeking the tax refund be released in favour of Ericsson.
The release would help RCom to clear a part of its its Rs 550-crore dues to Ericsson. The Supreme Court had, on February 20, held RCom chairman Anil Ambani and two others guilty of contempt for violating its order by not paying dues of `550 crore to Ericsson. The apex court had said that they would face a three-year jail term if the company failed to pay up within four weeks.
It also reminded the lenders that once the corporate insolvency resolution process (CIRP) begins, lenders would not get the `260 crore since it would go to the corporate debtor. The NCLAT had earlier halted insolvency proceedings against RCom after the case was admitted by the Mumbai bench of National Company Law Tribunal (NCLT) on May 15, 2018. The apex court had on October 23 asked RCom to clear the dues by December 15, 2018.
RCom has already deposited Rs 118 crore with the Supreme Court. Moreover, it has asked lenders to release the the income tax refunds of Rs 260 crore directly to Ericsson. The company is planning to raise Rs 200 crore to pay Ericsson Rs 550 crore including interest.
“Why should SC orders not be respected? Sending someone (Anil Ambani) to jail will not solve the problem before us. The SC has directed the company to repay the money,” it observed.
On February 4, the NCLAT had allowed Ericsson to file its reply on RCom’s plea for withdrawal of the appeals. The appellate tribunal had also directed the company not to sell, transfer or alienate any moveable or immovable property of the company without the prior permission of the NCLAT.
12 March 2019: The second round of coal auction under the Shakti-B scheme may see far fewer bidders than the first one held in 2017 because of an exclusion criterion. Analysts see power utilities with combined capacity of 407 MW could place their bids for coal in the forthcoming Shakti-B second round, which is just 5% of 8,440 MW capacity that vied for fuel in 2017.
KSK Mahanadi’s (Akaltara plant), Adani Power’s Tiroda and Kawai plants, GVK’s Goindwal plant and GMR’s Kamalanga unit, Bajaj Power, Adhunik Power, ACB and Inland Power had participated in the first round. All these players will not be eligible to participate in the second round to secure the balance fuel requirement.
Industry sources said the bidders participated in the auction thinking that it will only be a one-time process wherein the maximum allocable quantity would be restricted to 80% of maximum eligible quantity of all eligible bidders.
“If the maximum allocable quantum under second round of B (ii) auction was made available in the first round itself, the maximum allocable quantum i.e. in tonne would have increased, thereby the earlier bidders would have had opportunity in first round itself to avail more quantum against their requirement,” the Association of Power Producers said in a letter to coal minister Piyush Goyal in February.
“If the second window is now being contemplated to allow participants who have resolved issues related to non-submission of Discom certificates due to litigated/revision in PPAs, prevailing coal block litigations… then not allowing earlier bidders to avail their balance shortfall quantities will be a loss of opportunity for them.” “Further, to avoid any litigation issues arising out of loss of opportunity to earlier bidders, it would be prudent to allow their participation in subsequent rounds of B (ii) auction,” the letter said.
Ashok Khurana, director general of the Association of Power Producers, told FE although the companies are not looking at any legal action as of now, they would request the government to come out with a procurement policy that is not based on shortage of coal. “Unless there is certainty of coal supply, certainty of prices and quality, the bid becomes speculative, so that bidders either make windfall profits or a complete loss. Our request to the government is to create a sustainable model of coal procurement that is not speculative in nature,” Khurana said.
The government came out with the Scheme for Harnessing and Allocating Koyala Transparently in India (SHAKTI) to address the key challenge of coal linkage for around 40,000 MW stressed assets getting resolved under the NCLT.
12 March 2019: Now that two years have passed since the first major acquisitions under Insolvency and Bankruptcy Code (IBC), several players—buyers, investment bankers and dissatisfied creditors—are slowly opening up about what they see as chinks in India’s bankruptcy law.
These include repeated litigation—both during and after the process—missing physical assets in plants, the lack of judges and questions over the integrity of promoters of distressed businesses and resolution professionals.
The cracks in the resolution process are evident from the following developments:
- After acquisition of Monnet Ispat by JSW Steel Ltd in September 2018, operational creditor Bharat Heavy Electricals Ltd (BHEL) and unsecured creditor IFCI Ltd have challenged the resolution plan.
- The bidders for Amtek Auto and its unit Metalyst Forgings—London-based Liberty House and US-based hedge fund Deccan Value Investors, respectively—are challenging the information provided to them by the resolution professional during the bidding process. While Deccan Value Investors has asked NCLT to cancel its resolution plan, Liberty house has alleged in court that the contents of a forensic audit conducted by EY into Amtek Auto were not revealed to it.
“Often, resolution professionals are ill-equipped to fully oversee operations at companies. In other cases, there are serious integrity issues among resolution professionals and promoters,” an investment banker said on condition of anonymity. “We know of cases where equipment has been stolen from plants during the resolution process. In some cases, promoters litigate to draw out the resolution process while we hear of money being siphoned away from the company during this period.”
Mahesh Singh, founder and managing director, Singhi Advisors, said sometimes assets do go missing at the time of closure of the deal. “Buyers should get a chance to do the closing due diligence. Even so, there are legal remedies for when assets are missing because there is always a lag between selling a business and finally getting possession.”
Godrej Group chairman Adi Godrej said: “The bankruptcy code has been very poorly implemented because there have been so many cases of bankruptcy which have not been finalized. We allow them to go from one court to another and then we give them stay order. Our judicial process is very slow. “It (IBC) is not being implemented as well as it could have been. That is not perhaps for lack of trying but it is also our legal system and legislation.”
JSW Steel’s joint managing director, M.V.S. Seshagiri Rao said in a recent interview: “Under IBC, once a case in admitted, whatever cases are pending against a company, there is a moratorium on them. But once the resolution plan is approved, all of these spring up again. We are seeing this in several forums, in all companies that have been acquired, not just ours. I think some clarity is required here so winning bidders feel more comfortable that once the settlement is paid, everything else is extinguished.”
The major acquisitions under IBC were those of Bhushan Steel by Tata Steel Ltd; Binani Cement Ltd by UltraTech Cement Ltd; and Monnet Ispat by JSW Steel-AION Capital.
Kalpesh Kikani, managing director and senior partner, AION Capital, said at the Mint Investment Summit in Mumbai on 1 March: “First, the challenge is getting to know what the true price for the asset is. Step 2 is who gets how much among various financial creditors, be it secured, unsecured, secured with guarantee, unsecured with guarantee, and then you have some operational creditors who believe they are equal to financial creditors and others who believe they are better than financial creditors in terms of supplying (goods to a company even during distress). This Stage 2 of who gets how much is an integral part of IBC and will be the subject matter of litigation—and as a bidder this is something we always factor into our bids.”
12 March 2019: Meeting close to 350 homebuyers, representing nine separate associations of affected buyers, NBCC said on Monday it would soon share a tower-wise completion plan and ensure the cost of construction, including amenities, is done in the promised price.
Jaypee’s isn’t the only such case. As many as 72,000 buyers in the National Capital Region are waiting to get apartments they booked and paid for. Last month, the Supreme Court (SC) allowed the Delhi police to arrest Anil Sharma, chairman of the Amrapali group, and two directors of his company, Shiv Priya and Ajay Kumar. The city police’s economic offences wing had registered a case against the three on charges of diverting homebuyers’ money and not delivering projects.