RBI IN THE DRIVER’S SEAT – NPAs WILL REACH ITS DESTINATION?

By Ruma Dubey

When someone says, “Insolvency” or “Bankrupt” what is the picture that comes to your mind?

Call it the effect of movies but the first thing which the mind see’s is an officer downing the shutter or locking the gates of the factory while the owners cry and wail. Then there is the scene of owners absconding and hunt is on to find them while labourers are agitating that they have not been paid. There is also the most often seen scene of all things and bunglow being auctioned off while the family walks away with the framed picture of either God or a patriarch. Another scene which comes to mind is the once rich owners walking away from their swanky bunglows and cars in plain clothes and slippers, walking away as paupers, stripped of everything while the staff stands, head bowed, grief stricken.

Well, these are all really melodramatic scenes and insolvency or bankruptcy does not, in today’s time, mean any of this. But when the RBI announced on Tuesday that it has decided to refer twelve large bad loan accounts for resolution under the Insolvency and Bankruptcy Code, there was panic. The RBI announced the 12 names today and these were the usual suspects - Bhushan Steel, Bhushan Power, Essar Steel, Jyoti Structures, Alok Industries, Lanco Infra, JP Infra, Electrosteel, Monnet Ispat, ABG Shipyard, Era Infra and Amtek Auto. All these stocks were hammered down even before RBI named them and there was fear that these companies will now get shut down.

Now that is a really simplified way of looking at the smart move which RBI has made. Referring these 12 companies to Insolvency and Bankruptcy Code (IBC) means that these companies are being declared insolvent or bankrupt. This means the companies are unable to repay debts and it has gone bust! By inability to pay debt, it means current or future debts which the company is unable to pay when they become due. In some extreme cases it also means where value of the company's assets is less than the amount of its liabilities. It does not mean shutting down, not till the Committee (yes, there will now be one more to the already longlist) tries rescue plans and eventually when nothing works, decides to shut down.

What RBI has said that these 12 accounts have more than Rs 5,000 crore in fund/non-funds and over 60% of the account was non-performing as of March 2016. The twelve accounts based on this criteria account for 25% of the current gross non-performing assets (NPAs) in the system.

In almost all these companies, a rescue plan was in place but it simply did not take off. Restructuring, selling off of assets, and getting in strategic investors, nothing has helped these companies to deleverage their balance sheets. And that’s why the regulator has finally taken the lead and put in place a new process. So what does this “referring to IBC really mean?”

1. RBI will first intimate the banks about the 12 companies and formally initiate the IBC.
2. Amongst the banks, the lead bank in the Joint Lenders Forum (JLF) will be the one to admit the ‘case’ to the court – the National Companies Law Tribunal (NCLT).
3. NCLT will treat these cases, as directed by the RBI, on a priority. The case will be immediately placed under moratorium.
4. An interim insolvency resolution professional will be appointed to the case – from here on, the company will have no management control till a resolution is found.
5. And then follows the process of setting up committees. First the interim insolvency professional will form a committee – this will comprise of creditors of the company and this creditor committee will appoint the final insolvency resolution professional to work on a resolution plan.
6. The final insolvency resolution professional is given 180 days to come up with a resolution plan and get approval for the same from at least 75% of the creditor committee. This is then given to the NCLT for approval.
7. If no resolution plan comes up within 180 days, another 90-days grace period is given. And if nothing comes up even after these 270 days, the company will finally go into liquidation.
8. If 75% of the creditors on the Creditors Committee do not come up with any resolution, the company will go into resolution.
9. Liquidation means some parts of the Hindi movies scenes will come to play – assets will be sold to bidders.
10. Money raised will be distributed to creditors, employees and et al.

This are untested waters and we need to first tread it to know whether it will work or not, to understand the loopholes. It is good that RBI is in the driver’s seat now and there is an upper time limit of 270 days to know which side it goes. For now, let’s give it thumbs up and wait for the 12 names to be revealed.