Execution is key to NPA resolution under the bankruptcy code
Mumbai: The intent behind the Insolvency and Bankruptcy Code (IBC), under which an attempt is being made for the resolution of stressed assets at the National Company Law Tribunal (NCLT), is good, but execution holds the key, experts say.
Participants in the second Mint Stressed Assets Investment Summit, including investors, company promoters, bankers, legal experts and interim resolution professionals (IRPs), also stressed the need to put in place a systemic solution to the stressed asset challenge. Panellists at the event that happened in Mumbai on 7 December, moderated by Shrija Agrawal, national deals editor, Mint, included Supratim Sarkar, executive vice-president of SBI Capital Markets Ltd; Nikhil K. Srivastava, director, Kohlberg Kravis Roberts & Co. (KKR); Parth Gandhi, senior partner and managing director, AION India Investment Advisors Pvt. Ltd; Shrija Agrawal, national deals editor, Mint; Nishant Parikh, partner, Trilegal; Rajiv Kochhar, chief executive officer, Avista Advisory Group; and Uday Bhansali, president, financial advisory, Deloitte India.
Can you give us a sense of the good, bad and ugly of the stressed assets opportunity in the country?
Gandhi: I think the National Company Law Tribunal (NCLT) process was well thought through. Let’s see how the execution shapes up. Small and bilateral deals are happening but once we have a successful deal actually go through the NCLT, we would see more funds come in. In terms of interim resolution professionals (IRPs), service providers and legal services are not properly available.
The ugly would be the delay in the whole process. If the execution does not happen well and we go back to the old fashion, then that may create a problem. If the process is not efficient and a good company gets into liquidation, then that’s a bad thing.
Bhansali: Execution is the key to everything. IRPs on ground have taken charge of these cases. Tight cash flows, constrained budgets, local labour, security and safety issues are the some of the serious challenges. With the recent ordinance about the promoters being debarred from bidding for their own assets, issues have become much more complicated. It is impacting our ability to facilitate and review the cases, for example site visiting etc. We do need the support of everyone on the ground which is a challenge in itself at present.
Kochhar: The strict timeline of nine months (for resolution) which NCLT has been kept for getting things done would most probably be seen by mid-next year. You might see some good companies being taken to NCLT.
Srivastava: If there’s no timeline, we won’t be able to run the whole process; therefore the strict discipline of having 180 days and perhaps 90 days of extension is important. More people will understand the asset better through the given information and price discovery will be more efficient. The ugly part is that we are not able to provide information properly and therefore in order to get marginal safety, people are throwing lower bids. The process has to go smooth in that 270 days period.
Sarkar: The good part is that most of the assets are operating assets. In the steel front, most of the work has been done already by the government. The bad part is that some of the existing and potential bidders who have their investments in non-performing assets (NPA) or have some other issues, are out of the game; therefore it’s just a handful of buyers who will dictate a price. The other sectors like power, we are not witnessing any bids. Therefore, such kind of situations should be addressed by some governmental mechanism, which has already happened in the case of steel. The ugly part is yet to come. First 20 or 30 assets will have a buyer but for the rest of the assets if no one buys, then the assets will go into liquidation.
The government, through its recent ordinance, has banned a set of promoters for bidding for their assets in the resolution process. Do you think that there will arise a scenario where promoters will challenge the constitutionality of the ordinance?
Parikh: The government wants to ensure that the corporate resolution process does not lose its credibility, which is why they have prohibited certain classes of persons from becoming resolution applicants. The cases that are already filed, promoters will find it extremely difficult to bid for assets which have remained bad assets for more than 12 months.
However, going forward there will be more restructuring outside of the insolvency and bankruptcy code (IBC)...The second thing is that it’s a case of legislative overreach. A lot of the things government has done in the past is with great intention but the implementation was not up to the mark; therefore it seems to me that if you were really worried about the credibility of the process then why would you end up prohibiting every promoter who has had an asset which has been an NPA for more than 12 months from bidding for it. I certainly think that promoters may challenge the law. The Supreme Court has the ability to lay down the law and they never shy away from it.
When you peg bids as a resolution professional, what are the filters on the basis of which you decide a winning or non-winning bid. Is pricing a major issue?
Bhansali: As an IRP, personally we have to confirm the valid bid. We have to take care of various requirements like stakeholders’ interest, etc. In many situations the committee of creditors (COC) is appointing the advisors to help define certain criteria so that the evaluation takes place objectively.
Now the conversations are happening not just around amounts but the tenure of the whole process, loans, payments, terms and conditions of the loans, etc. This is all work in progress, especially in large asset cases. COC will finalize this in consultation with their advisors and lawyers.
As investors, from an NCLT process point of view what more things do you wish to see?
Srivastava: There are a couple of things in terms of processes which could be better, like getting information. The more information we get, the better we would price the risk. The second criteria is the framework that will be used to evaluate as there are multitudes of bidders and we need to understand the decision-making process. There is the COC, which will take decisions and then on top of that, you have different types of bidders who are bidding for different assets. Criteria differ with the situation. A lot of time when you are buying stressed assets it is hard to decide which asset to buy. You are essentially relying on NCLT to protect you from a lot of things.
What kind of haircuts are we looking at, because it seems largely like a buyers’ market right now?
Sarkar: Haircuts depend on the mindset. Whichever case has gone to NCLT, banks have provided for 50% as that’s the regulatory requirement. Steel is a market-driven sector whereas in the power sector, structural changes are required. Haircuts depend on the mindset of each asset class.
Is there a bias towards strategic investors over financial investors?
Bhansali: It’s a whole question of how to establish your evaluation framework. The whole objective of this exercise is to resolve the debt situation in the company and make it operational. I don’t think there’s any bias towards anyone. So, the idea is to come with an objective and transparent framework.
These are large and complicated assets. The ability to bring in right capital for right capital structures is something of which financial investor might do a better job and then might actually give a better value to the banks.
Sarkar: Assets are operational and if there is a strategic interest, definitely the value will be much higher than if a financial fund or stressed asset fund comes in and takes it. The reason being that at the end of the day, any fund is a temporary warehouse. The assets are probably running at 40% to 50% capacity utilization. They have to ensure efficiency improvement and then churn it out to the strategics. For any strategic it’s a golden opportunity to enter India and expand because if we look at the steel sector, steel requires investment of around approximately $400-500 million per million tonne and today land is not easily available to run a steel plant.