Tycoons get India court reprieve on RM228b of bad debt

By BLOOMBERG

NEW DELHI • Indian tycoons whose companies have fallen behind on loan repayments can breathe a bit easier now.

The nation’s top court on Tuesday struck down a Reserve Bank of India (RBI) directive that tightened rules for recasting delinquent accounts and mandated when they must be moved to bankruptcy tribunals. In doing this, the court restored to lenders some discretion in deciding how they want to resolve a loan once it’s in default.

Business tycoons in industries from power to aviation and real estate will now have more room to negotiate loan repayments with lenders even af ter payments become overdue. High on the list are power companies, which have argued that they shouldn’t be penalised since issues such as delayed government payments have made it hard for them to service debt.

The ruling will bring some relief to the founders of firms including Jet Airways India Ltd, founded by Naresh Goyal, and power generators including GM Rao’s GMR Chhattisgarh Energy Ltd and Manoj Gaur’s Jaiprakash Power Ventures Ltd, whose companies were at risk of being pulled into bankruptcy proceedings.

“Some sectors genuinely have been sick for reasons beyond their control,” said Rohit Wahi, CEO and country head at FirstRand Bank India. “Everything can’t go into bankruptcy court and get easily resolved. As long as bankers are negotiating and are confident that something can come out, the flexibility to negotiate further is something positive.”

Double-edged
The decision will aid about 70 borrowers with outstanding loans worth about 3.8 trillion rupees (RM228 billion), according to ICRA Ltd, the local unit of Moody’s Investors Service Inc. Almost half of these are power assets, including those of Lanco Infratech Ltd and GMR Infrastructure Ltd, which said electricity distributors controlled by provincial governments don’t clear their bills regularly, making it difficult for them to repay loans on time.

Shipbuilders, including ABG Shipyard Ltd, Bharati Defence and Infrastructure Ltd and L&T Shipbuilding Ltd, hope the ruling will help them and their lenders to refocus on rational debt resolutions that consider their sector-specific issues, V Kumar, president, Shipyards Association of India, said in an emailed response to questions. The order will help defence-related shipyards, with combined orders for 84 vessels, stay afloat, he said.

Still, there could be some confusion about the status of debt-resolution plans that were in the process of being implemented, said Krishnava Dutt, managing partner at law firm Argus Partners.

The top court said in its Tuesday verdict that all bankruptcy cases started under last year’s RBI directive would be closed. The RBI can’t give generic directions to banks to start insolvency cases except in specific instances of default and with the government’s authorisation, it said.

Under the RBI’s order, banks had to seek loan resolution if a borrower defaulted on repayment by even a single day. Lenders then had to recast the loan in 180 days or take the borrower before the courts under the insolvency and bankruptcy law.

Once a case is admitted into bankruptcy proceedings, the court appoints a professional to take control of the company and oversee the sale of its assets. Willful defaulters and owners of delinquent companies are prohibited from participating in the process.

Representatives for Jet Airways and Jaiprakash Power didn’t immediately respond to emails seeking comment, while GMR and the RBI declined to comment.

For banks, the ruling is a “doubleedged sword”, according to Rajat Bahl, chief analytical officer at Brickwork Ratings Ltd. While lenders will need to make lower provisions if accounts are kept out of bankruptcy court, the RBI rules had given “more teeth” to financial creditors by instilling fear in borrowers, he said.

Banks must provide for 15% of secured loans once an asset becomes non-performing, with the provisioning requirement jumping to 40% as soon as an account is referred to bankruptcy.

Moody’s said the judgement was credit negative for banks.

Significant Questions
The ruling raises “significant questions” about timely reporting and resolution under the bankruptcy code, according to Vikram Babbar, a partner and financial services lead of forensic and integrity services at consultancy EY.

“There are a host of wilful default and fraud cases still under the IBC, and more clarity would be required on how the same would be dealt with,” Babbar said in an email, referring to the Insolvency and Bankruptcy Code.

One company that may benefit is Jet Airways. Once the nation’s second- biggest carrier, Jet has racked up debt of more than US$1 billion (RM4.1 billion) and defaulted on loan repayments on Dec 31, 2018.

The airline, now surviving on an emergency loan from its lenders, would have had to face insolvency court if lenders were not able to find a solution by June 30, 2019, — 180 days from its first default. That threat has now been removed.

“Once that threat has gone now, it is to be seen which restructuring scheme will be made available to these companies,” according to Vishrov Mukerjee, a partner at law firm JSA Advocates & Solicitors.

“This will give breathing space to both banks and companies.” — Bloomberg