Lenders raise concern over disclosure of liquidation value in resolution process
Mumbai: Lenders are concerned that a provision in the insolvency and bankruptcy code (IBC), which requires the information memorandum to disclose the liquidation value of an asset that is undergoing the resolution process, is being used by bidders to avoid quoting higher mark-ups, said four people with direct knowledge.
Information memorandum is a document prepared by the resolution professional which gives bidders access to information such as the financial position of the debtor, information relating to disputes the debtor is involved in etc.
Bankers raised this concern in a meeting of Indian Banking Association, or IBA, last week, these people said.
“The resolution professionals have called for bids in at least 3-4 cases among the first list and the process to draw a resolution will gather pace. Hence, there is a need to re-look certain aspects of the code to ensure that there are no procedural hurdles. One major concern is on using the liquidation value to avoid realisation of actual value of the company,” said a senior banker from a large state-owned bank, one of the four people cited earlier.
The first list refers to the list of 12 cases which the Reserve Bank of India (RBI) flagged for early bankruptcy proceedings. These cases account for close to one-quarter of the banking system’s total bad loans.
“We are getting only a slight mark-up on the liquidation value and not the recovery we are hoping for. Another concern that we raised was about funds being used to repay the debt of vendors of sister concerns. However, that will be the resolution professional’s job to prevent it from happening," said another banker from the four people cited earlier.
Lenders are particularly worried since the pay off from the first case under the IBC—that of Synergies-Dooray Automotive—was only 6%.
“The value of the enterprise is usually much higher when valued on the going concern basis as compared to in a liquidation scenario. Since liquidation value is disclosed in the information memorandum which may be shared with bidders, it could lead bidders providing a price closer to the liquidation value and that could result in eventually lower recoveries for lenders,” said Aashit Shah, a partner at law firm J Sagar Associates.
A lower recovery from these big cases may further weigh on the balance sheets of the banks, who are already reeling under the pressure of high provisioning. According to a RBI directive, banks have to set aside 50% of the loan amount to cover the likely sacrifices they have to take in the bankruptcy cases. On 11 October, Mint reported that the government and banks are seeking relaxation on provisioning norms for IBC cases.
“Clearly the task for the creditors is cut out if they need to balance maximum recovery for all stakeholders. Some of the key milestones that they would need to hit is to balance the rights of minority shareholders and how to appreciate (evaluate) the various resolution plans. It would have been ideal if the law allowed the lenders to first look at a company as a going concern. Liquidation is last resort,” said Ashwin Bishnoi, a partner at law firm, Khaitan and Co.
Bankers are hoping that the Act itself will be amended. Earlier, lenders such as ICICI Bank Ltd, State Bank of India (SBI) and Bank of Baroda (BoB) had raised a concern that shareholders could vote against the resolution plan approved by the National Company Law Tribunal (NCLT), as Mint reported on 11 September. The clarification was sought as Section 238 of IBC says that provisions of the Act cannot contravene provisions of other laws—namely Companies Act. To address this, the ministry of corporate affairs (MCA) will soon issue a clarification, said two people aware of the development.
“Section 31 of IBC is amply clear that a resolution plan approved by NCLT is binding on all parties. However, to avoid any confusion a clarification would be issued stating that all parties includes the shareholders of the company as well,” said a senior ministry official, one of the two people cited earlier.
An email sent to the spokesperson for MCA was not answered immediately.
“Since the IBC does not currently provide that the provisions of the Companies Act or other Securities and Exchange Board of India or Sebi regulations do not have to be complied with, it could cause a problem if the shareholders don’t approve the steps in the resolution plan adopted by the committee of creditors (CoC) or the promoters vote differently for what is contemplated in the plan. I think there is an urgent need for some relaxation on this point for resolution plans to succeed,” said Aashit Shah, partner at law firm J. Sagar Associates.