LM: The RCom-Ericsson case is a one-off in banking sector’s NPA crisis

24 March 2019: Indian banks are famous for dragging their feet in taking decisions over soured loans. In the past, they had the full support of their regulator, the Reserve Bank of India (RBI), although that backing has waned in recent years.

Still, old habits die hard. State Bank of India chairman Rajnish Kumar said last week that lenders to Jet Airways (India) Ltd would make every effort to keep the airline from slipping into bankruptcy, as it would further erode the company’s value. Such an approach is fraught with risks.

What’s more, this was soon after an operational creditor, Ericsson AB, won a case in the Supreme Court that made Reliance Communications Ltd (RCom) pay it nearly half of what it was owed. This left banks red-faced, as Ericsson, an unsecured creditor, moved from being among the last in the queue for recovery, to first.

But to paint the Ericsson win as a complete failure for banks would be unfair. Ericsson’s repayment was the result of a contempt order from the Supreme Court that involved a jail term for RCom’s promoter if he failed to comply with the order. The amount involved as dues was also small. The  1,150 crore dues is paltry compared with banks’ exposure of roughly  40,000 crore. Operational creditors have been able to get back money from errant companies through the threat of insolvency proceedings in other instances.

Even so, these cases show that Indian banks are terrified of taking companies to insolvency courts though they see little hope in getting their money back on time. While there have been cases where companies have been dragged to the bankruptcy process, in a large number of cases, that was at the prodding of RBI.

The prime reason for this fear is that a resolution plan in their case would have to involve deep haircuts. “We can understand why bankers are reluctant for insolvency proceedings in some cases where a services company is involved. IBC is not the ideal platform to take a services company because they are thin on assets,” said Abizer Diwanji, partner and national leader (financial services) at EY India. IBC is the Insolvency and Bankruptcy Code.

Liquidation is akin to writing off the entire loan. A precursor to those haircuts would be the mandated 50% provisioning against the loan once the borrower is admitted to insolvency courts. A restructuring, on the other hand, would entail only 15% provisioning. Already bleeding due to provisioning against legacy stock of bad loans, banks do not want the nascent recovery in their balance sheets to be snuffed out by another wave of provisioning.

Efforts to not let RCom enter insolvency courts eventually didn’t succeed, and the company volunteered for bankruptcy proceedings last month.

In the case of Jet Airways too, it remains to be seen how long bankers can prolong the inevitable. The resolution plan would without doubt contain a debt-to-equity conversion. Emergency funds of  1,200 crore will be provided, as per media reports.

Ironically, banks will now own the very companies which had turned defaulters. Finding a strategic buyer and keeping haircut to the minimum is like the dream of having the cake and eating it too. In the case of Kingfisher Airlines, a similar arrangement had blown up in their face.

Banks need to realize soon that extending and pretending only makes them look gullible to take more risky assets. They have already hiked the stakes in the game by becoming largest shareholders of defaulting borrowers. To pull an Ericsson on defaulters is unthinkable.

Live Mint reported

BT: Anil Ambani’s Reliance Communications Enterprises pledges 12.50 cr shares of RCom with IndusInd Bank

24 March 2019: Debt-ridden Reliance Communications Enterprises has pledged 4.52 per cent of its holding in Reliance Communications (RCom) amounting to 12.50 crore shares with private sector lender IndusInd Bank, according to a PTI report.

Anil Ambani-led Reliance Communications Enterprises (RCE) currently holds 17.74 per cent stake, or 49.06 crore shares, in RCom, of which it had previously pledged 4.85 per cent, the agency reported.

With the fresh pledge on March 22, the total pledged shares by RCE now stands at 9.37 per cent of total share capital or 25.90 crore shares, it reported. 

Last week, lenders of RCom sold 12 crore pledged shares, which accounted for 4.34 per cent stake of promoters in the telecom firm. The pledged shares belonged to promoters including that of Ambani, his family members and RCom group entities, according to a BSE filing.

Reliance Communications, which was once the crown jewel of Anil Ambani’s business, witnessed significant decline in the promoter stake due to invocation of pledged shares by lenders. After filing for bankruptcy on February 1, 2019, there has been surge in selling of pledged shares of the company, especially by financial companies. 

Earlier this month, cash-strapped RCom saved chairman Anil Ambani from going to jail by paying Swedish telecom equipment maker Ericsson dues of Rs 462 crore. Last month, the Supreme Court had held Ambani in contempt for not following its order to pay back Rs 550 crore to Ericsson for its services to now-defunct Reliance Communications.

The Business Today reported

ET: NCLAT sets aside Jyoti Structures liquidation, asks considering Rs 4,000 cr plan by Sanghi, others

24 March 2019: The National Company Law Appellate Tribunal (NCLAT) has set aside the order to liquidate Jyoti Structure and asked the Mumbai bench of NCLT to consider the Rs 4,000-crore resolution plan submitted by Sharad Sanghi and others. 

Allowing the appeal filed by Sanghi in this regard, a two-member bench headed by Chairman Justice S J Mukhopadhaya has remitted back the matter to the Mumbai-bench of the National Company Law Tribunal (NCLT) directing it to pass an order within two weeks. 

“The case is remitted to the Adjudicating Authority, Mumbai Bench (NCLT), Mumbai to approve the plan…” said NCLAT in its

“The appropriate order be passed on an early date preferably within two weeks from the date of the production of the copy of this order,” the order added. 

The NCLT had on July 31, 2018, rejected the resolution plan submitted by Sanghi and had passed an order to liquidate Jyoti Structure, which had a debt of Rs 7,010.55 crore. 

According to the Rs 3,965.06 crore resolution plan submitted by Sanghi, managing director and chief executive officer of information technology solutions provider Netmagic, along with others, Rs 50 crore will come as an upfront payment followed by Rs 75 crore in the next one year. 

While, the remaining will come as staggered payments in 15 years from the effective date. 

Earlier, Sanghi’s resolution plan was voted by 62.66 per cent voting shares of the committee of creditors (CoC), while members with 23.12 per cent had voted against and the remaining 14.21 per cent remained abstained on March 26 and 27, 2018. 

Later, some members of CoC changed their plans and, finally, tally was reached to 81.31 per cent of the total votes in April 2, 2018. 

However, Sanghi’s resolution plan was rejected by the NCLT on the two grounds, as total period of 270 days as mandated under IBC had lapsed by the time last voting took place on April 2, 2018, and was approved with majority. 

Secondly, as on March 26 and 27, 2018, the voting percentage was 62.66 per cent which is less than 75 per cent votes of financial creditors. 

The order was challenged by Sanghi before the NCLAT, which had in August last year stayed the liquidation process. 

The appellate tribunal said NCLT had not considered the eight-day gap between the company being admitted under the corporate insolvency resolution process and the appointment of interim resolution professional for the company. 

“In the present case, as the application was admitted on 4th July, 2017 and after signature it was uploaded on 12th July, 2017 i.e. eight days and the ‘Interim Resolution Professional’ joined much thereafter, we are of the view that the Adjudicating Authority should have excluded at least eight days of period during which the order was passed, signed and subsequently uploaded,” said NCLAT said in its judgement passed last week. 

“If the aforesaid period of eight days is excluded, then we find that the resolution plan was approved within 270 days which the adjudicating authority has failed to notice,” it said further. 

Jyoti Structure had a liquidation value of Rs 1,112.52 crore, while the resolution plan has 43 per cent haircut to the creditors of the company. 

It was among the 12 companies in the first list issued by the government to face the insolvency proceedings in June 2017.

The Economic Times reported

BQ: Rs 3 Lakh-Crore Private Power Investment At Risk As Discoms Delay Payments

24 March 2019: As much as Rs 3 lakh crore of investment in a dozen power plants of the private sector is at risk of turning into non-performing asset as states buying power have not been making payment for months, official data and sources said.

According to data available on the PRAAPTI portal of the Ministry of Power, 12 power generating companies belonging to GMR Group, Adani Group and public sector generators like NTPC Ltd. have about Rs 41,730 crore outstanding from state distribution companies as of December 2018.

Dues as on date run into an estimated Rs 60,000 crore, half of it being towards independent power producers in the power sector.

The Bharatiya Janata Party-ruled Uttar Pradesh has the most outstanding dues of Rs 6,497 crore, followed by Maharashtra at Rs 6,179 crore. Other states not paying power generating companies on time include Tamil Nadu, Karnataka, Telangana, Andhra Pradesh, Jammu and Kashmir, Rajasthan, Madhya Pradesh and Punjab.

According to PRAAPTI portal, Uttar Pradesh takes 544 days to clear its dues while Maharashtra takes 580 days.

More than 80 percent of the outstanding is accounted for by India’s most industrialised states such as Maharashtra and Tamil Nadu who are biggest consumers of electricity. The top-10 states take an average of 562 days for payments.

Sources said the delay in payment is posing severe working capital issues at the private power plants.

Delay in realisation of receivables from the state distribution companies weakens the ability of project developers to service debt in a timely manner and leads to exhaustion of working capital in some cases, they said adding delayed payments risk projects being termed non-performing assets under the Reserve Bank of India’s new classification rules.

In some cases, the discoms continue to press for renegotiating terms of power purchase agreement. This coupled with non-payment of penalties/late payment surcharges is causing financial stress for such projects, sources said.

Bajaj Group-owned Lalitput Power Generation Company Ltd. reportedly is unable to clear salaries of nearly 3,000 staff because of pending dues of over Rs 2,185 crore from discoms of Uttar Pradesh. So acute is the situation that the company is unable to maintain requisite coal stocks.

A recent World Bank study reviewing the power sector’s performance points to challenges such as outstanding payments of generating companies pending with discoms.

Sources said 37,823 megawatt capacity in the private sector, which was built at an investment of over Rs 3 lakh crore, is at risk due to delayed payments and run the possibility of being declared NPAs if timely repayment of bank debt is not made.

Out of the Rs 41,730 crore outstanding as on December 2018, Adani Group has to get Rs 7,433.47 crore and GMR another Rs 1,788.18 crore. Sembcorp has an outstanding payment of Rs 1,497.07 crore.

State-owned NTPC has unpaid bills of Rs 17,187 crore.

Bloomberg Quint

BS: Lenders to cash-strapped Jet Airways weigh open auction process

24 March 2019: Lenders to cash-strapped Jet Airways plan to sell their stake in the airline through an open auction process over the next two months, seeking maximum value for the asset. 

In the meantime, the consortium led by State Bank of India will provide emergency funding of around Rs 1,500 crore to bring operations back to normal, in phases. A senior executive of a large public sector bank said this is a transitory arrangement in which the lenders will acquire control, run the process of transparent bidding, and receive final bids by the end of April. 

The bids will then be evaluated according to guidelines by the civil aviation ministry, following which a buyer will be selected. The outer limit for the process is May-end. Transfer of control to the buyer will be effected by June-end.

The resolution is being overseen under the framework of the Reserve Bank of India’s February 12, 2018 circular for dealing with stressed assets, which mandates the lenders to complete resolution within 180 days of default. In case of Jet, the 180-day period had begun from January 1, 2019. 
The open auction process will be similar to what is followed under the National Company Law Tribunal, but will be outside the insolvency code and tribunal. It is being done in this manner given Jet is a service sector enterprise with little or no assets. If lenders take the NCLT route, the airline will be grounded with practically no chance of revival. The cases referred to NCLT have taken a long time for resolution, said one private banker. 

Asked about the hit banks will have to take on exposure, a senior banker said: “The extent of write-downs we may have to take will become clear from the bids (price indicating expected haircuts) during the auction.” 

During the two-month period, lenders will control the airline but will run it with the help of airline industry professionals and turnaround experts, backed by active oversight of the board of directors. Naresh Goyal and his nominees will exit the board. 

Lenders said they would prefer to have an experienced banker as chairman of the board.

Banks will provide emergency funding of about Rs 1,500 crore to the airline and want it to return to 100 per cent operating capacity. 

A large number of planes in Jet’s fleet have been grounded due to non-payment of lease rentals. Lenders (consortium members) are approaching the Union civil aviation ministry with a plea not to take away the airline’s landing rights, slots and traffic rights, as it is necessary for protecting the economic value of the enterprise and attracting bidders, the bankers added.

The government was toying with the idea of providing unused airport slots of Jet Airways to other domestic airlines on an interim basis, a senior civil aviation ministry official had said on Wednesday, with a view to minimise flight disruptions.
The ministry has also held interactions with representatives of carriers such as Air India, SpiceJet, GoAir and IndiGo, to discuss issues such as augmentation of fleet and utilisation of existing planes.
The domestic carriers will add 20-25 more planes by April-end. Jet Airways as an entity is still a good asset with a strong brand, and evokes huge investor interest, said a senior public sector bank executive. 

The carrier’s international network and slots at key airports, too, are an attraction and lenders will be able to draw interest if they are successful in restoring the airline to its earlier strength.

“The airline has a well-balanced international network and serves all main markets from India, Hong Kong and Singapore in the east, several cities in West Asia, and London. Its partnership with Air France-KLM and Delta has enabled it to tap into Europe and North America and garner corporate traffic from those countries. The other key attraction is slots, especially at Mumbai airport, where it continues to be the dominant carrier,” said an aviation expert. 

With the fund infusion, the airline will be able to partially clear dues on lease payments and then negotiate a fresh payment plan to get the fleet operational, said people in the know.

The Business Standard reported

BS: Banks flag ‘tardy’ work, piling-up of cases at debt recovery tribunals

24 March 2019: The mounting pressure on banks to improve financial profile through recoveries has prompted lenders to send an ‘SOS’ to the finance ministry on the tardy decision making and pile-up of cases at the Debt Recovery Tribunals (DRTs) and its appellate forum the Debt Recovery Appellate Tribunal (DRAT). 

The tribunals are set to become designated forums for insolvencies and resolution of non-corporate entities under the Insolvency and Bankruptcy Code (IBC). 

The situation could worsen at both the forums as IBC cases are referred to them. This is because they are already grappling with regular cases.

A senior bank executive said, “The delays at the tribunals are impacting us adversely, be it in terms of costs (read provisions), litigation or manpower. This is over and above the uncertainly over the timing of resolution of high-profile cases of the National Company Law Tribunal (NCLT).”

These concerns have been conveyed to the finance ministry through the Indian Bank’s Association (IBA) earlier this month, the bankers said. In an effort to improve recovery, lenders feel frustrated with the current state of affairs at the two tribunals.

Infrastructure is insufficient at these forums. Also, adjournments are granted by the tribunals frequently, postponing the fate of decisions. Moreover, positions of presiding officers, recovery officers and registrar are lying vacant, the IBA said in its communication.

Out of the 44 DRTs and the sole DRAT, 11 benches have vacancies (of presiding officers) of which three are in crucial locations like Mumbai and Kolkata.

One of the DRTs in Mumbai is operating on a slow pace after the fire incident. New matters are not taken up. Even the interim applications have been held up due to paucity of time and place.

The increased pendency of matters at the DRT have adversely affected the recovery of public money, causing concern to banks. This position is alarming as it affects recovery efforts, said.  

Urgent steps are needed to repair the situation. Both have to be provided with sufficient infrastructure and people on a priority basis, the IBA said in a communication.

There has to be new DRTs and fortnightly review of pending cases. These steps will go a long way in hastening the process of resolution and recovery. It will also boost the capital of banks and thereby reduce dependency on infusion of capital.

The DRTs and the DRAT are designated forums for insolvency and recovery matters for non-corporates under IBC (2016) chapter four. When this provision is enforced, it will substantially increase the workload at these forums. Therefore, the capacity and capability of both have to be enhanced before the provisions of the fourth chapter are brought into force.

The Business Standard reported