The possibilities of further delays in debt resolution under the Insolvency and Bankruptcy Code (IBC) and the need to free up capital is being cited as among the reasons for the State Bank of India’s (SBI) unexpected move to auction its entire loan exposure worth Rs 15,431.44 crore in Essar Steel India Ltd. While SBI has initiated the process of sale of its loan exposure to asset reconstruction companies, banks and financial institutions; its decisions to seek resolution outside the purview of IBC is seen as having put a question mark on the efficacy of entire time-bound resolution process under the new bankruptcy law.
With no clear decision emerging in the Essar Steel insolvency resolution, despite the case being going on for more than 500 days at the Ahmedabad bench of National Company Law Tribunal and likelihood for further litigation in the case, the original idea of time-bound resolution within 180 days under the IBC now faces a tall challenge. As per the ArcelorMittal India Private Limited’s resolution offer for taking over of Essar Steel approved by the Committee of Creditors and filed in NCLT Ahmedabad, SBI was to get a minimum recovery of Rs 11313.42 crore.
As against that estimated recovery, SBI has kept the reserves price for sale of its Essar Steel exposure at Rs 9,587.64 crore above which buyers will have to bid on January 30. SBI said that the base price is determined “on the basis of NPV (Net Present Value) of minimum recovery discounted at 18 per cent with a time factor of 1 year.” In its loan auction notice, SBI has also mentioned a clawback option, which means that buyers must be ready to pay higher than the reserve price if the resolution happens in less than a year. NCLT Ahmedabad bench will take up this case on January 31, just a day after SBI concludes e-auction of its Essar Steel loans.
Question mark on efficacy of time bound resolution
SBI’s plan to sell its entire Essar Steel loan exposure has put a question mark on the efficacy of the time-bound resolution process which was the hallmark of the Insolvency and Bankruptcy Code (IBC). With the country’s largest lender inviting bids for e-auction of its Rs 15431.44 crore loan exposure to the steel maker on January 30, just a day ahead of the Ahmedabad bench of the NCLT was to hear to the resolution case, has created fresh challenges in resolution of the case under the IBC.
“SBI needs money from the Essar Steel loan before March-end to shore up its financial strength. Since time is money, and the case has chances of facing further delays, an outright sale will benefit the lender. But it does put a question mark over the efficacy of the resolution process under the IBC, which was expected to bring about time-bound recovery,” said a senior lawyer working on bankruptcy cases, asking not to be named.
SBI did not respond to queries from The Indian Express seeking comments.
In October 2018, the Essar Steel promoters Ruias had sought to turn the tables on ArcelorMittal with its eleventh hour offer of Rs 54,389-crore to settle the dues of banks and other creditors of steel maker. The Ruia offer was Rs 12,188 crore more than the Rs 42,202 crore bid put in by ArcelorMittal, which has been selected as the preferred bidder by the CoC. SBI – the largest lender to Essar Steel – was part of the CoC which approved the ArcelorMittal resolution bid. The total dues of Essar Steel is Rs 54,389 crore. With the lead lender planning to sell loans outside the NCLT, other operational and financial creditors, which were left out of resolution process, may get a chance to get back their dues.
A hallmark of the IBC law was that resolution should be done within 180 days and a maximum of 270 days. This was inserted to bring in urgency in the process of resolving Rs 11 lakh crore worth of stressed loans. However, at September-end, out of the 816 cases that were undergoing resolution under NCLT benches, 238 cases were going on for more than 270 days while 158 cases were on for more than 180 days. This means nearly 48.52 per cent of cases over shot the 180-day deadline.
In a report last November, rating agency ICRA said that banks are estimated to have lost out on about Rs 4,000 crore in additional income just for the initial 12 companies in the RBI’s list of June 2017 due to the delays in the resolution process beyond the 270-day period under the IBC.