Bad loan resolution: Banks need to watch for promoters trying to regain control
Banks may still have to grapple with possibility of promoters trying to regain control of companies referred for bad loan resolution through a front or an associate
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Despite optimism about early resolution of distressed assets under the new bankruptcy law, lenders may still have to grapple with the possibility of promoters trying to regain control of their companies through a front or an associate, experts say.
As a result, a sizeable number of cases being referred to the bankruptcy court may have to go through forensic audits to detect possible instances of related-party transactions, they say.
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“The risk of promoters attempting to take control through the back door is real,” says Reshmi Khurana, managing director of Kroll South Asia, which specializes in corporate forensic investigations globally.
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“Lenders have to make sure that the assets are being sold as per fair value and the buyer does have operational experience of running the assets,” she adds.
A buyer from a completely unrelated field is a major red flag for banks as was in the case of the sale of Kolkata-based Electrosteel Steels Ltd. The steel maker, which is among the 12 cases being referred to the National Company Law Tribunal under the Insolvency and Bankruptcy Code, was on the verge of being sold last year to First International Group (FIG) before it was discovered to be a related party, after banks asked Deloitte India to conduct a forensic due diligence exercise. The transaction was called off by the sellers following the discovery.
FIG had beat Tata Steel Ltd to emerge as the highest bidder for Electrosteel.
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“The solution is incentivizing the promoter to work with lenders to sell the assets” said Suresh Surana, founder and managing director of RSM Astute India, which specialises in bankruptcy resolution cases. “It is ultimately the promoter who is truly aware of the intrinsic value of the business and without his cooperation a smooth transition of the business may not be possible.”
Personal and corporate guarantees provided by promoters remain the primary reason for promoters to cooperate with the lenders. Getting that cooperation is crucial as lenders seek to find buyers for distressed assets. “Banks may be faced with a tough situation, where the highest bidder may emerge as a related party in some way,” a senior official of a public sector bank said, requesting anonymity. “We will take these calls on a case-to-case basis, depending on the merit of each.”
Experts say that in sectors such as steel and power, which account for the highest non-performing assets, there is a genuine dearth of buyers and banks may end up teaming with the promoter to look for a buyer. “In such cases, the banks will tread a thin line where they will have to ensure that process is as transparent,” said Khurana of Kroll.
Many global funds that have set up distressed assets platforms in India but are yet to make any sizeable investment, have meanwhile started working with promoters of smaller firms to take over bigger assets once they come up for sale.
“However, in most cases we may have to partner with the existing promoter to run the assets we may buy,” a senior official of a global distressed fund said on condition of anonymity.