The long-drawn resolution has seen suspect bidders, a surreptitious repayment offer and a barrage of allegations
Bankers say that Twin Star’s offer was in fact the best one among the 11 applicants. All but two of the preliminary bids failed to even meet the minimum criteria and were, thus, disqualified.
The circumstances under which the insolvency petition of Videocon Industries, a part of the larger Videocon Group, was admitted to the insolvency tribunal were rather unique. In May 2018, when the company’s lawyers were fiercely arguing against the petition filed by the State Bank of India (SBI), they received a message from the firm’s management, asking them not to vehemently oppose the petition “in public interest".
In fact, this was so strange that the tribunal judge had called it a “dramatic turn" and acknowledged that this move facilitated the admission proceedings. For people associated with the insolvency resolution process of Videocon Industries and 12 of its group companies, this was just the beginning of a whirlwind ride that, even after three years, is yet to conclude.
The long-drawn resolution has so far seen the change of resolution professionals, suspect bidders, a surreptitious repayment offer by the promoter and a barrage of allegations and counter-allegations. The case is now mired in last-minute litigation, which has unfortunately become a feature of India’s bankruptcy process.
At the heart of the problem, bankers say, is the estimated liquidation value of ₹2,568.13 crore. This is the rock-bottom value of a company’s assets, assuming it is sold off for parts in a fire sale.
In the initial days of the Insolvency and Bankruptcy Code (IBC), the liquidation value used to be publicly disclosed. By 2018, this value had begun to be shrouded in confidentiality. The change happened after bidders were found to frequently bid too close to the liquidation value, or the lowest possible price that one can pay to acquire an asset under the IBC.
In December 2020, over 95% of Videocon’s lenders backed the Vedanta Group firm Twin Star Technologies’ ₹2,900 crore resolution plan. This value implied a 95% haircut to lenders, who collectively have an outstanding exposure of ₹61,773 crore.
Dissenters to the resolution plan argue that the Twin Star bid is too close to the liquidation value and suspect that the confidential value might have been leaked. Under the plan, Twin Star would pay ₹200 crore upfront and issue non-convertible debentures to creditors with a face value of ₹2,700 crore, which could be redeemable in five instalments.
Senior bankers say that the haircut calculation, which has become a bone of contention, has some major flaws. Firstly, about ₹25,000 crore owed by Videocon Oil Ventures Ltd (VOVL), a group firm that was not part of the resolution process, has been added to the total outstanding debt. The reason for this double-counting, they say, is that Videocon Industries had given corporate guarantees for VOVL and, therefore, a sum of ₹25,000 crore is being claimed from the former. Secondly, financial creditors were to also get about ₹200-300 crore from the cash balances of the Videocon Group as part of the insolvency resolution.
“It (recovery) is not as low as it is made out to be. The primary reason for (the) low recoveries is because the company’s assets are not as valuable as much as its ballooning debt," said a banker, who requested anonymity.
The group has land parcels in locations such as Aurangabad in Maharashtra and Bharuch in Gujarat; Videocon Tower, a 13-storey building in Delhi; and several apartments, among other assets, according to bankers.
Changing tech landscape
What the messy bankruptcy story clearly demonstrates is that Videocon, which was once a popular brand for consumer electronics, has not been able to keep up with the changing technology landscape. But the group’s former promoter and chairman, Venugopal Dhoot, denies this claim. In an emailed statement to Mint, Dhoot claims that the company “kept pace with technology and adapted to changing scenarios".
The company’s CRT (cathode ray tube) television sets are no longer in vogue though. According to bankers, the company used to assemble these television sets after sourcing components from multiple vendors and, therefore, does not have much in terms of machinery that could be sold off.
“The value of its receivables and stock is extremely poor," said the banker cited above.
Stressed asset experts say that when a firm gets acquired with such a large haircut, lenders need to introspect about what went wrong. “They need to figure out if there were lacunae in (their) due diligence (while granting the loan) or did they do nothing to prevent the deterioration of the business once it turned into NPA (non-performing asset)," said Nirmal Gangwal, founder of the debt restructuring advisory firm Brescon and Allied Partners Llp. “Right now, banks are not thinking as to what went wrong and how such (a) large haircut could be prevented in the future."
According to a second banker, who also requested anonymity, the cancellation of the 2G telecom licences in 2012 dealt a major blow to the company.
Videocon had borrowed to acquire licenses and the interest on this debt kept on piling up. Later, when the firm won spectrum rights in six circles, it sold those rights to Bharti Airtel in 2016 and repaid about ₹4,428 crore to lenders. “The accretion of bad debt was also due to external circumstances (that were) beyond the control of the company," said the second banker.
In its arguments before the National Company Law Tribunal (NCLT) in 2018, Videocon also blamed the government’s abrupt decision to withdraw high value currency notes from circulation in November 2016. Touted as the antidote to unaccounted cash, counterfeit cash and corruption, demonetization led to a massive disruption in economic activity.
“...on account of demonetization, suppliers were unable to provide the raw materials. As a result, there was a sharp decline of the business (sic); as a result, Videocon Industries was constrained to close that business (CRT television sets). Because of these reasons, the cash circulation was disturbed which was beyond the control of Videocon," states a court document from June 2018.
In many ways, Videocon exemplifies India’s burgeoning bad loan menace—a result of years of lax underwriting, policies that change because of political whims and fancies, and an overreliance on bank debt has made public sector lenders bleed often.
While the IBC was an attempt to allow the lenders to swiftly clean up their balance sheets through a judicial process, the recoveries from the process over the last five years has not been very encouraging. Barring a few companies such as Essar Steel, Electrosteel Steels and Bhushan Steel, lenders have not recovered substantial amounts through the IBC. Although it could be argued that the aim of the IBC is not recovery but the resolution of stress, in India, where state-owned banks are funded by taxpayer money, low recoveries do raise a lot of eyebrows.
“Large haircuts are inevitable where the value of the asset is low. The resolution value should be measured against the value of the asset and not the loan," said Ashish Pyasi, an associate partner at law firm Dhir and Dhir Associates.
Pyasi says that no buyer will shell out more for an asset just because there are outstanding huge loans against such assets. This may result in big haircuts, but that is the realistic approach and the correct value, he says.
Similar to a few of its peers, Videocon’s promoter also made an attempt to retake the company by offering to repay the dues in a staggered fashion. This was promptly rejected by the lenders.
The bid by Venugopal Dhoot proposed to repay ₹31,789 crore and sought the lenders’ approval under Section 12A of the insolvency code. Section 12A allows creditors to withdraw the insolvency case from an official tribunal, provided 90% of them vote in favour of such a move. This acts as an exception to Section 29A of the code, which stipulates that a defaulting firm’s promoter will not be allowed to bid for the firm once it has been admitted under the IBC process.
The second banker cited above said that after the proposal from Dhoot in October 2020, creditors held a vote to see how many were in favour of a withdrawal. As it turned out, less than 1% of the creditors agreed. Creditors could have been even more circumspect than usual because of the litany of other legal issues that Videocon’s promoter was facing at that time.
Dhoot was facing a probe by government agencies over an alleged quid pro quo in connection with his investment in NuPower Renewables Pvt. Ltd, which was helmed by Deepak Kochhar, the husband of ICICI Bank’s former chief executive officer Chanda Kochhar.
With the promoter offer stuck in a “no-go zone", the committee of creditors (CoC) had to sift through the 11 preliminary plans that were submitted. Bankers say that while Twin Star’s proposal has been criticized due to the large haircut, it was in fact the best proposal on offer among the 11 applicants.
All but two of the preliminary bids failed to even meet the minimum criteria and were, thus, disqualified in the initial stages. There was a proposal from London-based V Shape Capital, which was below the liquidation value but was later increased following negotiations. However, bankers say that there were other concerns regarding V Shape’s proposal.
The company, registered at an address on Buckingham Palace Road, was incorporated on 12 June 2020, only months before it placed a bid. According to official documents from the UK Registrar of Companies (RoC) or the Companies House, V Shape Capital was registered with a share capital of £1,000 and has one director, 64-year-old Suresh Chandra Pandya. Interestingly, on 13 January 2021, a month after the lenders approved Twin Star’s bid for Videocon, V Shape applied to the RoC to be struck off and dissolved.
V Shape Capital or Pandya could not be reached for comment. Asked if V Shape had any links to Videocon, Dhoot said, “V Shape Capital is a robust fund in itself. We do not have any direct or indirect connection with the fund."
Litany of litigations
Unlike promoters of other firms, Dhoot was not willing to back down despite the rejection of his plan. On 31 July, he filed a petition in the National Company Law Appellate Tribunal (NCLAT) against the Videocon Group resolution professional Abhijit Guhathakurta, the committee of creditors and the resolution applicant—Twin Star Technologies. Dhoot alleged that the commercial wisdom exercised by the lenders is “arbitrary and irrational" and “does not reflect any applicability of mind by rejecting a proposal which was 10 times higher."
According to Dhoot, his proposal under Section 12A was “robust and cohesive". Guhathakurta did not respond to an email seeking comment.
Apart from Dhoot, at least three dissenting creditors who voted against the resolution plan in December—Bank of Maharashtra, Small Industries Development Bank of India (Sidbi), and IFCI Ltd—have also filed similar appeals. An official at one of these lenders said that the steep haircut was not acceptable. This fresh round of legal challenges will prolong the denouement of Videocon for a bit longer.
However, Gopal Jain, a senior advocate representing Twin Star, is confident. “There is already a precedent set in the ArcelorMittal-Essar Steel insolvency case, where the Supreme Court said the decision of the CoC is binding," he said.
Amid these legal tangles, questions are also being raised on whether the NCLT had overstepped its ambit by making scathing observations about the low recovery. The tribunal observed in its 8 June order that the total haircut to all the creditors is 95.85% and, therefore, Twin Star was paying “almost nothing".
The tribunal also observed that despite the liquidation value being confidential, “a doubt arises upon the confidentiality clause being in real time use (sic)".
With so many doubts and questions and criticisms, the commercial wisdom of a bunch of lenders (who make up the CoC) might go through another legal test in the coming days.
Bikash Jhawar, a partner at law firm Saraf & Partners, believes that the NCLT is definitely going beyond the ambit of the insolvency code when it tries to assess the quantum of haircuts.
“It is an auction-based process and it is not just one or even five banks that are on the CoC. Multiple lenders look at the process," Jhawar said.
That said, the Videocon saga is far from over.
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