Bankruptcy Restructuring in India

1
Bankruptcy Restructuring in India

• 29 November 1999
• KISHORE SONI
• Chief Executive
• SONI INDUSTRIAL RESTRUCTURING CONSULTANTS NEW
  DELHI

2
Insolvency Regime in India

• Concept of industrial sickness
• Sickness worse than Bankruptcy- defined based on
  net worth and not by debt default
• Sick Industrial Companies (Special Provisions)
  Act, 1985 - SICA
• Board for Industrial Financial Reconstruction
  (BIFR)

3
BIFR PROCEDURE
4
SICA definition -- its problems

• Either SICA catches it too late

• Or, companies fudge accounts to get shelter under
  BIFR
• Reference mandatory

5
SICA definition -- its problems

• BIFR either identifies extremely sick firms or
  mistakenly declares non-sick companies as sick
• Asymmetry between lender and borrower -- at the
  expense of lender
• Lender NPA after 180-days default
• Borrower NPA after net worth ? 0

6
BIFR delays Jan 97 to Mar 98
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Pending cases at BIFR
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Where does BIFR stand?

• Objective bad managers, like bad currency to be
  kept out of circulation
• Facts speak otherwise
• Total cases disposed 1229
• Mergers 94 (8)
• Change in management 39 (3)

9
Where does BIFR stand?

• Automatic suspension of all legal proceedings
• Average delay gt 3 years
• More than 18 got illegitimate stay till the case
  got rejected
• Debtor in possession

10
APR violations then and now
Then...
Now
Fudged revenues to get DSCR gt 1.33 7-10 year
sacrifices Secured creditors taking hits to help
equity
One-time settlements Debtors still squeeze the
creditors on OTS Creditors want to book profits
and, so take hits for equity
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Agenda for Reforms

• Early detection
• Speed
• Voluntary references
• Facilitation and quick arbitration

12
Towards a new SICA

• Definition to be altered to debt default
• Onus on company
• Time bound negotiations
• If negotiation fails, referred to BIFR
• Appointment of administrator by BIFR
• Invitation for a two-part bid
• Creditors vote on the bids

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An alternative
30
Negotiate with secured creditors
Debt default
Go to BIFR
Succeeds
Fails
Appoints administrator. Orders sale of company
60-90
Limited stay
120
Two-part bid
Due diligence
Creditors short-list part I bids
Best part II bid wins
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A Caveat

• Indian law requires liquidation by courts which
  confirm the Hindu belief that there is life after
  death

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Reform or Perish...

• No. of references to BIFR shooting up since 1996

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Reform or Perish...

• Bank credit in sick industries increased by 14
  to Rs157 billion as on March 1998
• NPAs at Rs586 billion as on March 1999
• This massive gap demonstrates urgency for quick
  reforms of bankruptcy laws