Kolkata: Several Inter-Creditor Agreements (ICA) have either been signed or are in the process of being firmed up by lenders in the short span of less than a month after the Indian Banks’ Association (IBA) issued detailed instructions on June 18. These include cash-strapped mortgage lender Dewan Housing Finance Corporation Ltd (DHFL), Reliance Infrastructure Ltd of the Anil Ambani Group and polyester-based items maker JBF Industries.
In the case of DHFL, the ICA involves as many as 27 lenders, including the State Bank of India (SBI). A total of 16 lenders have joined hands for the ICA with Reliance Infra. The one for JBF Industries will also include several lenders led by a large public sector bank. IBA issued its new guidelines after the Reserve Bank of India had relaxed some norms for resolution of stressed assets on June 7.
What Is an ICA?
In ICA, lenders to corporates join hands and engage with the borrowers whose assets have started showing signs of becoming sticky. In fact, they have been enabled to move as soon as the first default of repayment occurs. They engage with the borrower and the borrower prepares a debt resolution plan with the knowledge of the lenders. Lenders have total discretion in this respect. ICA is thus an additional window for settling debts, devised by IBA keeping in mind RBI's framework.
In contrast, proceedings under the Insolvency & Bankruptcy Code (IBC) of 2016, are a judicial intervention by the National Company Law Tribunal. In ICA, there is no judicial intervention and, therefore, resolution of stressed assets is expected to be faster.
Once a resolution plan is okayed as part of ICA by creditors either unanimously or by a majority, it is binding. But under IBC, a party aggrieved with the NCLT's decision can go in appeal to the appellate tribunal (NCLAT) and the process is delayed, despite prescribed timelines.
Under IBC, the resolution process practically starts when distress signals are visible. Under ICA, it starts when lenders see first signs of stress (first case of default).
IBC is just one of the responsibilities of NCLT. It is over-burdened and also hamstrung by shortage of judges. In this situation, borrowers seem to be seeing merit in dealing with lenders under ICA.
According to informed quarters in the banking sector, the expectation, as of now, is that the ICA route may prove to be “a faster way of doing it outside the IBC”. This point will be proved if lenders are able to sew up some more ICAs before long. Because of the mounting regulatory pressure and tightened vigil by the investigating agencies, owners of stressed assets and defaulters are displaying more willingness than before in sorting out matters with their lenders, say sources.
DHFL is reported to have indicated that it prefers a composite RP without any haircut (loss) to its lenders. This ‘surprise, surprise’ suggestion has come at a time when haircuts, at times quite stiff, have become the order of the day for lenders, added sources.
When asked by NewsClick as to the chances of the ICA route succeeding, the IBA chief executive V G Kannan said: “My understanding is that the banks are satisfied with the RBI framework and the ICA format. The banks are already seriously on the job”.
RBI’s Revised Framework for Bad Loans
The framework was released by the RBI in its revised circular of June 7, which followed the Supreme Court’s order of April 2 holding the RBI’s circular of February 12, 2018 on the subject as ultra vires. In the revised circular, the RBI stressed that the key principles underlying the regulatory approach are:
Early recognition and reporting of default in respect of large borrowers by banks, financial institutions and non-banking financial companies;
Complete discretion to lenders to design and implement resolution plan (RP) subject to specified timeline and independent credit evaluation;
A system of disincentives in the form of extra provisioning for delay in implementing RP or initiating insolvency drill;
Withdrawal of asset classification dispensation on restructuring and future upgrades to hinge satisfactory performance;
For restructuring, definition of ‘financial difficulty’ to be aligned with Basel Committee guidelines and
Signing of ICA by all lenders to be mandatory which will provide for a majority decision-making criteria.
However, wherever necessary the RBI will ask banks to start insolvency process against borrowers for specific defaults so that the resolution momentum is not weakened.
Revised ICA as devised by the IBA
Following this, the IBA too came out with its revised guidelines. In cases where a RP is to be implemented, all lenders have to enter into an ICA during the 30-day review period (given to lenders after the first default to lay down ground rules for firming up a resolution strategy and implementation) to prescribe ground rules for execution of the RP with respect to borrowers with credit facility from more than one lender.
The lead lender has to keep others updated for preparing an RP and it will be free to convene meetings as and when necessary as also when a request is made by lenders whose share, as on start of the review period, in the aggregate outstanding is at least 33% by value.
For voting, the lead lender has to place the valuation methodology to compute the resolution value and the proposed RP. If any lender abstains from voting on any matter, that lender shall be deemed to have voted against it by the lead lender. During the resolution process and implementation of the RP, lenders including dissenting ones should agree that they shall not initiate any legal action / proceedings (even those under the IBC) which may jeopardise successful execution of the RP against the borrower or any other person.
The RBI’s new framework lays down, inter alia, decision-making by lenders holding 75% (by value of total outstanding facilities) and 60% by number and protection of dissenting lenders.
Facilitating Resolution of Distressed Firms
Meanwhile, the Budget for 2019-20 allows extension of the benefit of exemption from the purview of Section 79 of the IT Act to the subsidiary as also the subsidiary of the distressed company. This, the Budget document explains, is intended to allow consolidation/restructuring at a group level rather than at an entity level. It will also incentivise the acquirer to as the relaxed provisions will be extended to the subsidiaries as well.
Similarly, Section 115 JB will see changes so that distressed companies and their subsidiaries are able to set off unabsorbed depreciation and brought forward business losses (excluding depreciation) against their book profit while calculating payable tax under the Minimum Alternate Tax (MAT) provisions.
It may be mentioned that Section 79 (pertaining to IBC cases) allowed carry forward and set off of losses in case of closely-held companies as long as the beneficial shareholding is the “same by 51 per cent or more” in the year in which loss was incurred vis-a-vis the year in which set off was sought.
Vide Finance Act 2018 Section 79 provisions were relaxed where change in shareholding resulted in a previous year following approval under the IBC of a resolution plan. Changes were also made in the MAT and Section 115 JB provisions for ensuring set off benefits in respect of aggregated unabsorbed depreciation and brought forward business losses (excluding depreciation). The budget for 2019-20 thus improves upon what is already available.
The writer is an independent journalist based in Kolkata.