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Sunday, September 20, 2020

‘DEA warned about redemption risks to AMCs, capital adequacy issues in nearly 1,500 NBFCs’

Days later, on October 1 that year, the government moved the National Company Law Tribunal (NCLT), seeking to supercede the IL&FS board and appoint a new board in its place. The government's plan was approved by the NCLT on October 2.

Written by Aashish Aryan | New Delhi | Updated: February 12, 2020 3:17:57 am
Sixteen months & Rs 100-crore fees later, no sign of IL&FS resolution plan The NCLAT had, in October 2018, imposed a moratorium on debt-repayments.

The Department of Economic Affairs (DEA) raised “red signals” about the possible collapse of Infrastructure Leasing & Financial Services (IL&FS) in September 2018 and the impact it would have on the economy, the Ministry of Corporate Affairs (MCA) has said.

Days later, on October 1 that year, the government moved the National Company Law Tribunal (NCLT), seeking to supercede the IL&FS board and appoint a new board in its place. The government’s plan was approved by the NCLT on October 2.

In a fresh affidavit filed with the National Company Law Appellate Tribunal (NCLAT), the MCA has said the DEA had then warned about the risk of redemption on all asset management companies (AMCs) that had exposure of Rs 2,800 crore or more to bonds of IL&FS, which could subsequently force these AMCs to sell government securities.

”Hence government securities will face a huge selling pressure so either bond yields will shoot up to 8.30-8.50 per cent levels or the RBI (Reserve Bank of India) has to do the OMO (open market operations). If RBI opts for OMO, then the government spending amount will be reduced by an equal amount,” the DEA had said in a note to the MCA.

Further, the DEA had also warned that the licenses of almost 1,500 non-banking financial companies (NBFC) could be cancelled as they did not have adequate capital. Furthermore, mutual funds, which were the main buyers of corporate funds had completely stopped buying, the DEA had said in its note.

”Primary market in the corporate bonds has completely dried up as no one is willing to buy currently in the expectation of further redemptions from mutual funds,” the DEA had said.

Pension, provident, employee welfare, gratuity, superannuation, and army group insurance funds have an exposure of up to Rs 10,173 crore, while scheduled commercial banks of the country have an exposure of Rs 44,075 crore to the IL&FS group. The IL&FS group had an overall debt of more than Rs 94,000 crore as of January 2020.

Of this, the new board at IL&FS has managed to complete the sale of its wind energy assets, thereby leading to a debt resolution of Rs 4,300 crore.

Explained

Financial institutions may challenge MCA plan on cut-off date

In the fresh affidavit, the MCA has proposed that the cut-off date for payments to banks, mutual funds, and other welfare funds be set at October 15, 2018, with no repayment thereafter. The move is likely to be challenged by these financial institutions which will have to forgo interests of over 16 months if the plan, as proposed by the MCA, is approved by the NCLAT.

As reported by The Indian Express, the new board, which took over in October 2018, is also facing troubles getting the a final resolution plan approved, despite having shelled out nearly Rs 100 crore in legal and other fees.

In its latest affidavit, the MCA has again proposed a revised distribution framework, which envisages that from the monies being recovered, the first payments should be done to all financial and transaction, the legal counsels, the resolution consultants, and independent valuers. Along with this, the money should also be used to cover the costs for advertisements, audit, and of meetings, the MCA has proposed.

For other creditors, whether senior secured, secured, or unsecured, all payments should be done only till October 15, 2018, and thereafter no payment requests should be entertained, the MCA has said in its affidavit to the NCLAT.

The new board, the MCA has said, has also proposed that about while 55 companies in the ‘Green’ category could be released from the interim injunction put in place by the NCLAT on October 15, 2018, the time period for resolution for about 105 other companies should be extended further by at least 270 days from whenever the new resolution plan is approved.

To simplify the resolution process of IL&FS and its 348 subsidiaries, the new board of the company had classified all the companies into three groups namely Green, Amber, and Red, based on their capability to service debt obligations.

At the time of classification, companies which could service their debt obligations to both secured and unsecured creditors were placed in the ‘green’ category, while those which could service their debt only to the secured or senior secured creditors were placed in the ‘amber’ category. The group companies of IL&FS which were in no position to service their debt to either secured or unsecured creditors were placed in the ‘red’ category.

The NCLAT had, in October 2018, imposed a moratorium on debt-repayments.

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