The Insolvency and Bankruptcy Code (IBC) has been in focus given the respite it promises to various stakeholders and its ability to expeditiously resolve large amounts of non-performing assets (NPAs). Being a time-bound process to resolve cases (maximum of 180 days extendable by 90 days), the Code has materially contributed to India’s 30 place jump in 2018’s ‘ease of doing business’ ranking. It attempts to prevent value destruction and is touted as a significant reform in solving the twin balance sheet problem, developing a robust corporate bond market and improving the credit environment.
The Code has garnered attention of several investors as time is ripe to take the plunge to acquire valuable assets at attractive prices and reap lucrative double-digit returns. For years the creakingly slow and uncertain legal framework coupled with incomprehensible bureaucracy had kept these investors at bay from entering the stressed asset space.
The cumulative debt of the first 40 cases mandated for bankruptcy proceedings amounts to ₹ 4 trillion. Of these, around five cases have been settled (at haircuts varying from 55-75%). At an estimated 50% haircut the remaining cases themselves represent an ₹ 1 trillion M&A (mergers and acquisitions) opportunity. At the start of the year around 2,500 cases were up for resolution which has now more than doubled— even if a percentage of these are resolved, it represents significant M&A opportunity.
M&A activity in the stressed assets space has not been complemented by the much spoken enthusiasm of the investors and conducive investment landscape due to some of these deterrents.
Modification to law
The Code is at a nascent stage and has been amended to plug loopholes and fine tune it. Many investors are waiting on the sidelines for the law to evolve before investing.
These modifications have not put to rest looming issues which are of concern to investors such as operations of plants in post transfer of assets, period of commitment towards units, expected timelines to close allocation process. Sector specific concerns may require intervention from the government.
Low recovery rate
While bidding for the assets, investors are seeking huge haircuts after considering overall spend estimation on capital expenditure, balancing equipment, regular infusion of working capital, settlement of other liabilities and cost involved in the resolution process.
Banks have been reluctant to swallow the big discount that investors are demanding.
In few cases the holding company has been taken through the insolvency process. This invariably results in failed resolutions because the assets lie in subsidiary companies/special purpose vehicles. A mechanism to look at “group" insolvency can prevent value destruction and aid the recovery process.
Cross border liquidation
The Code presently has provisions relating to cross border insolvency but these are not adequate to effectively deal with many default cases. A draft bill is in progress and hopefully will be enacted after due diligence.
RBI in February ordered lenders to initiate bankruptcy proceedings within 180 days of default of a single payment. Defaulting promoters have to find ways to bring in more capital, else, they face bankruptcy. This creates investment opportunities in pre-insolvency stage. It has resurrected asset reconstruction companies (ARCs), which buy NPAs from financial institutions at a discount to book value and clean up their balance sheets while the specialists in the ARC can turn the stressed assets around or sell them. Funds can use ARCs as an investment vehicle to warehouse the acquired loans and get a seat at the committee of creditors. While one awaits the guidelines, under the recently launched “Project Sashakt", lenders will be able to transfer NPAs onto the books of the AMC immediately, and ARCs will have the opportunity to revive the asset –another opportunity for investors awaits.
The Code has instilled a sense of urgency among all stakeholders to resolve bad loans. Fear of losing control over their companies has prompted various promoters to settle or resolve their dues which presents a huge opportunity for investors. Despite certain deterrents the stressed asset landscape can be instrumental in achieving a fillip in M&A trades.
Sanjeev Krishan is partner and leader, private equity and deals, PwC India and Vandana Garg is partner, business recovery services, PwC India.