(By D K Aggarwal, Chairman and MD, SMC Investments and Advisors Ltd.) To deal with bankruptcy cases, both the RBI and the government have taken companies with big loan defaults to the National Company Law Tribunal (NCLT) for debt resolution.
A total of 9,073 cases are under consideration at the NCLT as on January 31, 2018. These include 1,630 cases of merger and amalgamation, 2,511 cases of insolvency and 4,932 cases under other sections of the Companies Act. Taking note of the disturbing bad loan situation, the government had announced a Rs 2.11 lakh crore bank recapitalisation plan to help PSU banks come out of the mess. Almost all PSU banks saw significant restructuring pipelines.
Steel represents the biggest sector among defaulters referred by their lenders to the NCLT under the Insolvency and Bankruptcy Code (IBC). With companies such as Bhushan SteelBSE -0.68 %, Essar steel, Monnet Ispat & Energy, and Electrosteel Steels in the fray, the steel sector accounts for over 40 per cent of the value of stressed loan cases referred to the tribunal. The steel industry has gone through a global turmoil -- weak demand, surge in imports and coal block cancellation have made their balance sheet go awry.
In a recent development, Tata Steel has offered to shell out Rs 36,400 crore for its acquisition of Bhushan Steel, as against the defaulted loan of Rs 44,480 crore. If Tata Steel’s bid gets through the NCLT approval process, it would immensely boost the confidence of public sector banks, which are struggling to recover loans extended to the highly-leveraged steel sector. It would also help in getting back almost 60 per cent of the advances made to Bhushan Steel.
Similarly, the Vedanta Group has emerged as the top bidder for bankrupt Electrosteel Steels. Moreover, Tata Steel, Nippon Steel & Sumitomo Metal Corporation, the Vedanta Group and Steel Authority of IndiaBSE 1.60 % have also bid to acquire Essar steel. As of now, the NCLT is looking into the bad debt of more than 36 large companies, which together owe more than Rs 4,00,000 crore to the banks.
The silver line is the bankruptcy proceedings against defaulters may overhaul the banking sector as a whole. The total gross NPA in the Indian banking system totalled up to around Rs 9 lakh crore. The resolution process for the first 12 accounts started gathering steam soon and as of now, all the 12 initial cases have made some progress. Also, the recent direction from the RBI to lenders to scrap all restructuring programmes and ensure all defaulters were classified as NPAsindicates that banks can no longer hide defaults under schemes like CDR, flexible restructuring of long-term project loans (the 5:25 scheme), SDR and S4A (Scheme for Sustainable Structuring of Stressed Assets), and help the banks remain transparent in their balance sheet.
As of now, defaulters under the IBC at the NCLT are processing their way through various stages of the resolution process. It seems that banks could see light on the other side of the tunnel. Now, potential buyers are shopping at cheap valuation. Any resolution of the cases would be fruitful not just for potential buyers but also for lenders as it would have a positive effect on profitability and capital.
Similarly, potential buyers with a healthy financial profile have a chance to increase their market share by bidding for these assets at attractive valuations.