Slow realisation of capital from stressed industrial assets has left Indian lenders concerned as bankruptcy board looks towards global investors
Indian billionaires are galore and growing. But where are the new local big-time industrial investors? In fact, there are hardly any. The last five years have seen more industrial sickness than ever before for the same period. Banks have lost advances worth billions of crores to the industry as stricken assets. Many companies have been referred to the Insolvency and Bankruptcy Board of India (IBBI) by creditors for resolution. However, few genuine local bidders are coming to their rescue. In a way, banks themselves are responsible for the situation. Dishonest bankers deliberately overlooked inflated project cost estimates by promoters before clearing their loan applications. This helped promoters happily siphon of surplus loan funds to create private wealth. Higher project cost means higher product cost. Thus, many projects turned sick even before taking off. Now, scores of large heavily borrowed sick public companies are under the IBBI hammer. Defaulted promoters are barred from bidding for their bankrupt companies though, quite surprisingly, some of them have offered to substantially clear their debts. One wonders if these defaulters have the necessary resources, why did they wait this long to be pushed to bankruptcy proceedings by their large creditors?
Local businessmen know how most of these companies went down under their greedy promoters, systematically converting corporate assets into their private wealth. Business globalisation and cheaper imports are already posing big threats to local industrial ventures. With the protectionist policies nearly gone, almost the entire existing Indian corporate sector, barring possibly pharma and healthcare industries, is passing through difficult times. The performance of listed Indian companies in recent years has been under severe pressure from imports, straining profit realisation. For instance, the January-March 2019 period was expected to be a redeeming quarter for Corporate India to make up for the weak financial performance in the first three quarters of 2018-19. However, if 104 early-bird companies' earnings for the fourth quarter of FY19 are an indication, India Inc is then staring at another washout year in FY19. The combined net profit of these companies across sectors is down 0.5 per cent year-on-year during the quarter, their worst showing in three years. The numbers exclude exceptional gains and losses. The country's current core sector industrial health could be best gauged especially from the poor performance of the power sector.
Incidentally, metals and electrical power sector companies are among the top enterprises facing insolvency petitions. However, the promoters are trying to hang on to their stressed industrial assets. They are constantly trying to mislead and manipulate the authorities to delay insolvency proceedings. Not surprisingly, a sudden emergence of 'flippant' bidders has turned out to be the latest nuisance before the authorities. Some of those 'flippant' bidders may be actually working incognito for defaulted promoters to delay the process of 'resolution'. In fact, IBBI is said to be so upset that it is seeking to penalise such 'flippant' bidders and managers of stressed assets to help quicken the recovery of bank funds locked in bad loans and prevent fraud. IBBI is believed to have filed nearly a dozen cases in recent months to punish fraud linked to bankruptcies, after a Liberty House plan for a stressed automotive asset didn't result in payments. Just about 53 per cent of the corporate insolvency resolution processes (CIRPs) completed till March-end have ended in liquidation and solutions have been found for only 13 per cent of the troubled companies. And, the average realisation by financial creditors as a share of the admitted claims was just around 43 per cent, shows the IBBI data till March 31. Lenders are worried as nearly a third of the insolvency cases being processed have already crossed their deadlines. The IBBI data reveals that the stipulated 270-day deadline has been breached in 362 of the 1,143 ongoing corporate insolvency resolution cases. Due to inordinate delays, banks have been forced to sell their stressed exposures to Asset Reconstruction Companies (ARCs). Such delays have hurt cash flows of banks very badly.
Lately, the Indian insolvency watchdog has stepped on the gas to resolve the bankruptcy crisis by seeking to rope in more global investors. IBBI chairman M S Sahoo recently led a 10-member team to Hong Kong to individually meet over a dozen investors with a dedicated focus on stressed assets. The delegation had reportedly met with funds like Goldman Sachs, Bank of America ML, SSG Capital, Pepper, Bain Capital, Deutsche Bank, Nexus Capital Management and Davidson Kempner. This is the first such occasion where IBBI went abroad to meet investors individually. As mentioned earlier, most of the large stricken assets available now are in the metals and power sectors. The investors are said to have raised a few points, citing lingering court cases and the status of operational creditors in insolvency proceedings. Obviously, global fund managers want a clean and clear process, instead of a transaction with prolonged legal tussle and government intervention.
Quizzically, there are also reports that IBBI — maybe, under political pressure or frustration — is also considering to 'provide defaulting promoters last chance'. This is particularly so if IBBI's recently proposed draft regulations on changes in 'liquidation process' are anything to go by. The draft regulations seek to allow a 'corporate debtor' facing liquidation to file a 'compromise or arrangement' scheme under the Companies Act that would enable the debtor to continue the journey as a going concern. Such a compromise will invariably dilute the very essence of the current liquidation process. Unfortunately, many feel that powerful industrial promoters will continue to pressurise the next government to find their way through. Many of them have strong clout with most political party bosses. They will try to dilute the system to their advantage. Ideally, the next government should chart a route for individual insolvency with clear phasing, sequencing, timing and destination. That should be the 'Next Big Thing' after the government passed at least some milestones in corporate insolvency.
(The views expressed are strictly personal)