LL: NCLAT Gives Nod To Insolvency Proceedings Against Sahara Q Shop

16 August 2019: National Company Law Appellate Tribunal refused to grant relief to Sahara Q Shop Unique Products Range Limited against an order passed by the National Company Law Tribunal admitting an application filed against the said company under section 9 of the Insolvency and Bankruptcy Code, 2016.

The present appeal arose from the order of the National Company Law Tribunal which had admitted an application filed by S. Gurumoorthy under Section 9 of the IBC against Sahara Q Shop Unique Products Range Limited – (‘Corporate Debtor’), on the main ground that there is no default on the part of the ‘Corporate Debtor’.

The Appellants have argued that the order was passed ex parte and it also suffers from various infirmities. Moreover, the reliance was placed on the orders of the Supreme Court in Contempt Petition No. 412-413 of 2012 wherein the Corporate Debtor was directed to not to part with any movable or immovable property until further orders of the court. They also argued that they have still not received the funds that were supposed to get from the National Spot Exchange Limited due to intervention made by SEBI.

The Respondent, on the other hand, submitted that the aforementioned Contempt Petitions were preferred by ‘Sahara India Real Estate Corporation Ltd.’ and ‘Sahara Housing Investment Corporation Ltd.’. resultantly, all orders that have been passed by the Hon’ble Supreme Court in the Contempt Petitions are to be read and understood in the context of these two companies only. Moreover, ‘Sahara Group Companies’ have even settled claims relating to ‘Operational Debt’ amounting to Rs. 20 crores as recently as on 30th April, 2019.

National Company Law Appellate Tribunal found no merit in the appeal and dismissed it by noting that except vague statement made by the Appellant, there is nothing on the record to suggest that the Hon’ble Supreme Court has passed specific order prohibiting Sahara Q Shop Unique Products Range Limited (‘Corporate Debtor’) to release or pay any amount.

The Livelaw reported

DNA: Ratnagiri Power on revival path as lenders sign inter-creditor pact

16 August 2019: Ratnagiri Gas and Power Pvt Ltd, which had turned a non-performing asset (NPA) for banks in the fiscal first quarter ended June after Reserve Bank of India (RBI) insisted to downgrade the account, is now on course for a resolution.

Canara Bank, which had taken a dissenting approach from the other lenders and moved the National Company Law Tribunal (NCLT) against the resolution plan of Ratnagiri Gas and Power (RGPPL), has come on board.

All the ten lenders in the consortium have buried their differences and signed the inter-creditor agreement that gives RGPPL, which owns an integrated power generation and regassified liquefied natural gas (LNG) facility, a deep restructuring of its Rs 9,000-crore loan for a repayment cycle of 10 years.

The banks have submitted the resolution plan to RBI and are awaiting approval.

“Canara Bank was the only one which was yet to sign the agreement. As a result, RBI asked all the banks to downgrade the account and classify it as an NPA in the June quarter. Now with all the banks in agreement, we have submitted the proposal to RBI for its final approval. We will abide by whatever the regulator tells us,” said a banker who is involved in the restructuring process.

The Plan

  • Power plant loans will be restructured by the banks
  • LNG business would be demerged into a new company, Konkan LNG Pvt Ltd
  • The demerged entity will be given a loan of Rs 1,500 crore for a breakwater facility
  • The sustainable part of RGPPL’s loan of Rs 9,000 crore would be serviced by the company
  • The unsustainable part will be converted into cumulative redeemable preference shares
  • The sustainable loan will be repaid over a 10-year period at a rate of 10%

The restructuring will involve bifurcating RGPPL’s business into two parts –Power plant whose loans will be restructured by the banks, and demerger of the LNG business into a new company, Konkan LNG Pvt Ltd (KLPL). This demerged entity will be given an additional loan of Rs 1,500 crore for a breakwater facility. In March 2018, National Company Law Appellate Tribunal (NCLAT) had approved the demerger of RGPPL’s LNG business into KLPL.

The debt restructuring will involve dividing RGPPL’s existing loan of Rs 9,000 crore into sustainable, which the company will service, and unsustainable, which will be converted into cumulative redeemable preference shares (CRPS). The sustainable loan will be repaid over a 10-year period with an interest rate of 10%, down from the earlier 13%.

Canara Bank, which had an exposure of Rs 400 crore, had filed two separate cases against RGPPL and KLPL under Section 7 of the Insolvency and Bankruptcy Code (IBC), which had taken the other banks in the consortium by surprise and delayed the resolution plan.

The Dabhol Power company, which is now called RGPPL, was set up in 1992 as a joint venture between Enron as a majority shareholder while GE and Bechtel were minority shareholders. But the construction and operation of the plant were in news for corruption involving political parties, both in India and the US. The central point of the controversy was over the pricing of power, which fixed at Rs 8 per unit was exorbitant compared to the hydroelectricity power, which was at just Rs 0.35 a unit. The power purchase agreement was signed with the Maharashtra State Electricity Board (MSEB). In 1999, the plant began producing energy, but by 2001 MSEB stopped paying for the power and sought to cancel the power purchase agreement. After Enron ran into scandals in the US and finally filed for bankruptcy there, the Dhabhol plant stopped production.

In 2005, it was taken over and revived by converting it into RGPPL, a company owned by the government. The loans and equity were later bought by a consortium of lenders and MSEB, GAIL and NTPC in 2005.

The Konkan-based power plant ran into trouble in 2013 after lower natural gas output from Reliance Industries’ KG D6 basin hit production. Current shareholders of the RGPPL is National Thermal Power Corporation (25.51% stake), GAIL (25.51%) , MSEB (13%), IDBI Bank (12.50%), SBI (10%) and Canara Bank (2.15%).

The DNAIndia reported

IE: ‘Red’ IL&FS entities account for more than two-thirds of group’s overall debt

16 August 2019: Out of total debt of more than Rs 89,000 crore held by Indian entities of the IL&FS Group, as much as Rs 61,375.6 crore was held by 82 entities which were not able to meet payments to even senior secured financial creditors. These companies have been classified as ‘red’ entities by the IL&FS resolution consultant. Red entities are those which cannot meet their respective payment obligations towards even senior secured financial creditors as and when they fall due in the testing period.

Of the total 302 IL&FS entities, 169 are Indian entities carrying total external fund based debt of about Rs 89,246 crore, as per the fifth progress report on the group’s resolution process and the way forward, submitted to the Mumbai-bench of the National Company Law Tribunal (NCLT) on Wednesday.

Among the 169 Indian entities, the resolution consultant has classified 158 entities into ‘red’, ‘amber’ and ‘green’ categories — based on a 12-month cash flow based solvency test. Classification for remaining 11 entities is underway.

Green entities are those which are able to meet their financial and operational payment obligations through their operations and existing cash flows. These entities do not rely upon other IL&FS Group entities for any financial support to service its debt obligations.

Amber entities, meanwhile, are those which were unable to meet all their respective obligations — financial and operational — during the testing period but can only meet operational payment obligations and payment obligations to senior secured financial creditors.

Question marks over lending practices of financiers

While the quality of loan book of a finance company is key to its liquidity, it has now come to light that over two thirds of IL&FS debt has been in its group companies that are not in a position to repay their obligations, thereby rendering the lenders at liquidity risk. This not only reflects on financial health of IL&FS group companies but also raises question marks over the lending practices of its financiers.

The progress report shows that entities classified as red and amber comprise over 87 per cent of the total outstanding debt of over Rs 89,000 crore. Apart from red entities, 13 amber entities carry debt of Rs 16,372.6 crore. A total of 55 entities have been classified as green, which carry debt of Rs 11,022.9 crore.

This reveals the scale of the challenge at the hand of new board of Infrastructure Leasing & Financial Services (IL&FS) which is trying to deal with the mountain of NPAs that has gripped the financial sector through a series of default. The collapse of IL&FS engulfed the entire NBFC sector, leading to a broader slowdown in the economy and forcing the government to supersede its board.

Separately, as per a March 22, 2019 Reserve Bank of India inspection report on IL&FS included in the progress report, the group did not declare bad loans in the four fiscals till March 31, 2018.

The RBI inspection report also found that that non-performing assets (NPAs) on IL&FS’ books were as high as 70 per cent of its total loans and advances by March 31, 2018. It further noted said that “wide divergences were observed” between the reported and the assessed position of asset classifications and provisions at IL&FS.

“The erstwhile Board failed to exercise oversight over the functions of the entity. They did not monitor the affairs of the downstream entities in which investments were made,” RBI said in its report, adding that that serious deficiencies in credit appraisal, and loans were given to unrated or poorly rated borrowers.

As per the progress report, IL&FS has started process of sale of assets, group companies, real estate, cars and other cost cutting measures to put its house in order. For instance, in the case of IL&FS Engineering & Construction Company Ltd, the manpower on rolls of the firm has reduced by 57 per cent from October 1, 2018 till June 30, 2019, leading to 58 per cent reduction in the wage bill. Cost of contract staff was also fell by 90 per cent in the same period.

Across the group, head count decreased by 43 per cent from October 1, 2018 till June 30, 2019, leading to savings of nearly 47 per cent in annualised wage bill, the progress report said, without specifying the number of employees that were laid off.

However, the process for sale in the case of IL&FS Securities Services Ltd (ISSL) was put on hold due to regulatory scrutiny. The group had invited expressions of interest for a potential acquisition of the company on November 13, 2018. “However, the sale process of ISSL was kept on hold inter alia in view of the investigation of Sebi and EoW (Economic Offences Wing) in relation to certain mutual fund units provided as collateral for trades (in Option Contracts) conducted by Allied Financial Services Pvt. Ltd (a client of ISSL),” the report said.

The Indian Express reported