First the good news. One must congratulate the Mumbai bench of the National Company Law Tribunal’s (NCLT) for restoring our faith in the system. NCLT refused to accept at face value the outrageous proposal by 90% of the committee of creditors (CoC) to accept a one-time settlement (OTS) offer by the Sandesara family (promoters of Sterling Biotech) to retain control over the company.
In fact, the NCLT bench slammed the bankers
, Andhra Bank, which leads the CoC, and exposed the questionable and hasty manner in which the Bank has tried to withdraw the bankruptcy application. At the hearing on 11th March, it became clear that the CoC has not shared any details of the proposal with the NCLT or the resolution professional (RP).
Instead, the Bank had the temerity to tell the RP that “should the NCLT seek information about the OTS offer, including sources of funds, time frame for payment to each lender, compliance with RBI norms and whether the interest of all stakeholders/CoC members have been provided for under the OTS offer, the applicant Andhra Bank and CoC will address all such queries posed by the NCLT directly and not with the Resolution Professional” (emphasis as in the NCLT order). The judges also pointed out that the OTS proposal is from some Farhad Daruwalla, signed on behalf of the ‘Sandasera Group’ when the applicant before the NCLT is a specific legal entity– Sterling Biotech.
Meanwhile, the four promoters—Nitin Sandesara, Chetankumar Sandesara, Dipti Chetan Sandesara and Hiteshkumar Patel - are absconding from India and have extradition orders issued against them by a Delhi court. The CBI (Central Bureau of Investigation) has initiated action against the all the Sandesaras as well as Rajbhushan Omprakash Dixit and Vilas Joshi, chartered accountant Hemant Hathi as well as a former director of Andhra Bank Anup Garg. The last name needs to be noted in the context of the OTS.
The withdrawal application merely says that 90.32% of the bankers had accepted the OTS offer with no details provided to NCLT. Fortunately, NCLT refused to accept this impertinence and has issued notices to financial regulators and investigation agencies that have been pursuing various violations by Sterling Biotech offering them an opportunity to make their representations at the next hearing on 26th March.
Meanwhile, details of the deal, which were not provided to the NCLT, were leaked to various media houses. These show that banks were willing to accept an offer of just Rs5,500 crore from the Sandaseras, which entailed a haircut of a massive 65%. There is no mention of the offer from ACG Associated Capsules Pvt Ltd that was rejected by the lenders.
In effect, a bunch of mainly public sector banks (PSBs), led by Andhra Bank, were brazenly willing to settle for less than half the amount due, to allow the Sandesaras to fly back to their 40,000sq ft (square feet) mansion at Vadodara in their Rs100 crore Gulfstream Jet and retain control of the company at a time when fugitive industrialists, from Vijay Mallya to Nirav Modi, are finding it difficult to live their lavish lifestyles with dignity or respectability abroad.
If such a scandalous deal, with a huge hair-cut, was contemplated for one of the biggest and most scandalous defaulters like Sterling Biotech, whose promoters are absconding, one can only imagine what is going on at banks with regard to loan write-offs and settlements.
What is to stop these brazen banks from offering fresh loans to the company once the OTS has faded from public memory?
By accepting this proposal, bankers have established that they cannot be trusted to take the right decisions to protect, either the banks’ or public interest. Moneylife has repeatedly argued that recapitalising PSBs with lakhs of crores of public money paid through the exchequer, without any effort to make top management accountable and independent of political influence only means throwing good money after bad. It sets the stage for the creation of newer bad loans, even as the earlier ones are written off, through such settlements.
The NCLT order makes it imperative for the finance ministry and the Reserve Bank of India (RBI) to question the CoC and initiate action against them if ‘phone banking’ has truly come to an end, as asserted by the prime minister (PM). Otherwise, it leaves plenty of room for suspicion and drawing negative conclusions, given the disreputable antecedents of this company.
Background of Sterling Biotech’s Promoters
To understand why this attempt to let Sterling Biotech back into his business is so scandalous, here is a quick rundown on actions against it. Apart from defaulting on loans to the tune of Rs8,100 crore, the promoters have been accused of fraud, which is being investigated by CBI. The enforcement directorate (ED) and the serious frauds investigation office (SFIO) are probing various charges, including money laundering, and have attached assets worth Rs4,700 crore, say media reports.
We further learn that the tax authorities are looking at the suspiciously low price at which a bungalow was sold by them to a leading Mumbai politician. Their closeness to the former CBI special director Rakesh Asthana had been making news while the top two officials of the investigation agency squabbled and traded charges against each other.
While an OTS proposal has been made in the case of Sterling Biotech, this is not the only group company in a financial mess or under investigation. Sterling SEZ and Infrastructure Ltd also faces bankruptcy proceedings and money laundering charges by the ED.
Implications for Other Deals
We need to watch what happens on 26th March and how the regulators and investigators respond; but, if a company with the antecedents of Sterling Biotech gets away by paying 45% of what it owes banks, then ArcelorMittal that has paid over Rs8,000 crore (to settle Uttam Galva’s debt, among others), merely to have the right to bid for Essar Steel, can kiss its money goodbye.
After all, how can banks justify accepting its Rs42,000-crore bid when the promoters of Essar Steel (who have already filed an appeal before the appellate tribunal) have offered a 100% repayment totalling Rs53,000 crore, including money owed to operational creditors, such as Standard Chartered Bank, who are also in court.
Bhushan Power and Steel could also demand a generous OTS, doesn't matter that both these groups have already availed multiple bailouts by PSBs over the past decades. Similarly, if the Sandaseras’ source of funds is not questioned, then why question Essar’s or Bhushan’s?
Nitpickers would argue that Essar Steel’s case is different because the CoC in that case has already accepted the Arcelor Mittal bid. But that would make it even worse. If the quality of the bidders and the colour of their money doesn’t matter, then PSBs that are surviving on money gouged from customers and frequent bailouts by the exchequer ought to be held accountable for failing to recover Rs11,000 crore extra that the Ruia family is offering. Put in perspective, this extra is significantly more that the full outstanding loan of Sterling Biotech.
Bad Loan Cycle Continues
One of the biggest concerns over the past five years, as banks teetered under the weight of bad loans (mostly inherited pre-2014), is that banks have been allowed to write off bad loans furiously and are being re-capitalised by the exchequer even as there is no move to improve management accountability.
While PM Narendra Modi is correct in poking fun at the ‘phone banking’ culture that prevailed in the past decades, he has little to show about making PSBs independent or accountable.
The Sterling Biotech deal, as well as State Bank of India’s attempt to sell off the Essar Steel loans to an asset reconstruction company when it is close to a resolution, are both indicators that little has changed on the ground.
The same machinations, pressures and collusion that have given us over Rs12 lakh crore of bad loans, remain. The bankruptcy process may lead to a temporary clean–up; but the furious pace of creating fresh bad loans that require a government bailout will continue. Meanwhile, nothing has also been done to make regulators like RBI or the National Housing Bank (NHB) accountable.
"In another revelation on Tuesday, the Committee of Creditors` lawyers said that the promoters have revised the settlement offer and instead of clearing the full OTS by March 31, they will now pay a token Rs 179 crore and the rest, estimated around Rs 3,100 crore, in June."