Can Insolvency aid India’s infrastructure?

Many infrastructure companies are going through Corporate Insolvency Resolution Process (CIRP); some of them were also in the first target list of the Reserve Bank of India (RBI), wherein 12 companies were identified in June 2017 to proceed in under the code.
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<p> The Insolvency and Bankruptcy Code 2016 has affected all the sectors of the Indian economy without any exception to any particular sector. After one and a half year also, every day an application filed by operational creditor or financial creditor is been admitted against a big corporate house. Day by day the number of applications being filed under the code are increasing, though the pace at which the resolution plans are being approved is minimum.</p>
<p>The infrastructure sector plays a vital role in any economy. In the Indian economy, the infrastructure sector is responsible for the development. This sector includes roads, power, dams, bridges, etc. There are many initiatives which this sector enjoys, despite that it could also not escape from this draculin proceedings under the code. The infrastructure sector is more prone to proceeding under the code because in most of the cases, the debts taken are not linked to the completion of the project or the performance of the project. There can be numerous reasons for defaulted accounts in this sector like escalation cost, increase in the price of raw material, workforce unavailability, etc. but under the code, there is no exception for these factors and the code only provides for the concept of default. The lenders are only required to prove the existence of the default.</p>
<p>Many infrastructure companies are going through Corporate Insolvency Resolution Process (CIRP); some of them were also in the first target list of the Reserve Bank of India (RBI), wherein 12 companies were identified in June 2017 to proceed in under the code. </p>
<p> <span style="font-weight: bold;">Power mess</span><br />
The other hit to the infrastructure sector is the circular of February 2018, wherein the RBI had asked the banks to prepare the resolution plans for the defaulted accounts (having exposure above Rs 20 billion) within 180 days. If the resolution plan is not prepared within 180 days, then within the next 15 days, the banks are required to proceed with filing an application before the adjudicating authority under the code. In the said circular of February 2018, the RBI had introduced the concept of 1-day default, i.e., the banks have to identify the incidence of default even where the repayment has been overdue even by a day. Furthermore, the RBI has scrapped all the earlier notifications w.r.t restructuring; in other words, the chances of restructuring by companies by adapting to various schemes like Corporate Debt Restructuring, S4A Scheme, etc. will also not be available to defaulted accounts. </p>
<p>Most of the companies on which the said circular applied are infrastructure companies (more precisely power companies). Further, the deadline for the accounts which were identified as the defaulted account having an exposure of Rs 20 billion or more had expired on August 27, 2018. Barring few as per the news, in most of the companies now there is a threat of CIRP, since the lender banks are not able to prepare a resolution plan.</p>
<p>It’s not that only the RBI is pushing the defaulted account towards the code, the lenders themselves are trying to recover their debt through the resolution plan or in worse scenario through the disposal of assets in liquidation. Though, if one refers to the resolution plan approved in most of the plans, which have been approved by the committee of creditors (lenders) are with the huge haircut.</p>
<p> The huge haircut in the infrastructure sector is not only the problem, when an entity goes into CIRP, the other companies related to such entity also comes under the threat of insolvency. It can be due to being the guarantor of the main entity or any other reason. The code now permits to take action against the guarantors also and that moratorium period does not apply in case of guarantors. In other words, if a parent entity in infrastructure sector goes into CIRP, there is always a threat that the infrastructure subsidiaries of such company will also go into insolvency. The other threat which the sector faces is chances of the successful resolution plan.</p>
<p> In a nutshell, until and unless an exception is being given to the infrastructure sector by the Government of India or by the Reserve Bank of India, the sector will remain prone to insolvency proceedings.</p>
<p> Authored by <span style="font-weight: bold;">Daizy Chawla, Senior Partner, Singh &amp; Associates.</span></p>