The Inter-Creditor Agreement hammered out by banks for loans to DHFL has now moved into the laps of retail holders of Non-Convertible Debentures issued by DHFL. These investors have been asked by Catalyst Trusteeship Ltd, the debenture trustee to communicate their acceptance of the Inter Creditor Agreement, thereby placing a highly complex decision into their hands.
The email from Catalyst Trusteeship Ltd seen by Mint says three things about the Inter Creditor Agreement (ICA). First, it says that the ICA provides for a ‘standstill period’ for enforcement of any legal rights of any creditor. The execution version of the ICA on the website of Catalyst states that the standstill period will initially be for a 30 days review period and another 180 days thereafter. Second, it says that the ICA lays down a voting arrangement inter-se the creditors of the issuer, in respect of the resolution plan. Third, it says the ICA also provides for realization of liquidation value in the event the resolution plan (as approved by specified threshold of creditors of the issuer in accordance with the ICA), is not acceptable to a dissenting creditor.
The email further goes on to say that the mandate given by the Debenture Holders for joining the resolution process as per the ICA, will be acted upon as and when the required threshold i.e. 75% of the value of debentures outstanding under each Series, is received. In cases where the threshold is not achieved and there is default, appropriate actions including enforcing the security, may be taken in respect of outstanding NCDs under such series.
What should investors do
The ordinary NCD holder should sign the inter creditor agreement since that way there is a chance of some amount being recovered," said Kumar Shardindu, former CEO, SBI Pension Fund Pvt Ltd. “He should be mentally prepared to take a haircut up to 50%. There is no real alternative. The legal expenses of approaching the DTR alone would outweigh any benefits of recovery." This view was echoed by Babu Sivaprakasam, partner, Economic Laws Practice, a law firm. However he added that it is unclear whether the ICA which has been formulated under an RBI framework will be binding on individuals. “The position that some of the creditors and individuals dissenting debenture holders may enforce their rights outside the resolution process will create a situation where the creditors under ICA may likely have to approach NCLT and seek moratorium to be imposed on recovery suits while the resolution plan is being finalized," he added. “Such a plan may consider giving preference to small investors." In other words, the ICA does not currently contain favorable provisions for small debenture holders and this may be brought in by court order.
A plain cost-benefit analysis of the situation suggests that retail NCD holders should sign the ICA. However the lack of preferential provisions for small NCD holders is a major disappointment.