How the Sterling Biotech Deal Could Derail Bankruptcy Law
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. 
 
Comments
Veeresh Malik
3 years ago
Whilst it appears that the offer such as it is has been hugely reduced, the whole exercise appears to be an effort to waste time till the election results emerge, so.

"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."

https://www.zeebiz.com/companies/news-can-seize-sterling-biotechs-ots-amount-enforcement-directorate-to-banks-91762
Gupta
3 years ago
Its indeed a shame that this Govt hasn't openly acknowledged the corruption deeply embedded in the banking system and done something to systematically fix it (I'll acknowledge its tough and there isn't an easy implementable solution for it either). But its also true that they have put a number of bankers in jail and many CEOs have lost their jobs for malfeasance, which was unheard of in India in the past. The way Mallya and Modi are being pursued in UK where they are being made to run from pillar to post or shift houses every week to run is also evidence of the new approach in pursuing crooks. Kudos to them to make that beginning for people at high levels to realize that their powerful seats aren't forever. Change will happen, it has begun.... and with the rotten and deeply corrupt institutions we have, it will take a long time to fix everything. These guys in the current govt are far from perfect, but they are different. Let's give them the chance to continue this change... to let it bloom into something bigger over a period.. they certainly aren't worse off, if not better.
Mahesh S Bhatt
3 years ago
Put this rascals behind bars in violation of Fiduciary contracts for 7 years asap to get ease of doing business Bunch of Illegal hawks hawking Justice Law Banks n systems Mahesh Bhatt
shivkumar
3 years ago
More the things change, more they remain same. Loot of PSU banks continues
unabated in connivance with the bank officials.
Thanks to Sucheta she keeps on throwing light on shady deals
from time to time by people in position and power.
Keep it up Sucheta and Debashis.
Meenal Mamdani
3 years ago
Is it possible that this ex-Andhra Bank employee Anup Garg has made this offer without consulting the other banks' officers?
Should this Anup Garg not be in prison while this strange offer is being investigated?

If bank officials are found to have acted in bad faith they should face a financial penalty as well as time behind bars.

I am worried that if Modi too is reluctant to hold bankers to account then how can we expect anything more strict from the Congress pols if they win the general election; the same pols about whom Mukesh Ambani said "Congress to apni dukan hai."
Ramesh Poapt
3 years ago
superb!!!
Ravindra Shetye
3 years ago
I think you are not right in mixing this case with Essar Steel. Essar's offer in the first place came too late after the NCLT due process was over. They could have made the offer during the process and I believe in the timeline if they would have offered to meet complete 54000 crores liabilities they mostly would have got to run the plant. However Ruia tendency of stretching has come in their way.
In Sterling case again Andhra Bank name has shined. Maybe there are many more skeletans lying in Andhra Bank.
Sucheta Dalal
Replied to Ravindra Shetye comment 3 years ago
well , the bottom line is Rs10,000 crore of public money. If Sterling is allowed to keep the company despite dubious antecedents - do you as a citizen condone letting go of Rs10,000 crore extra when banks are frequently recapitalised using public money? The poorest Indian also pays the bad loans of dubious industrialists when the money goes straight from the exchequer to bailout banks.
Gupta
Replied to Sucheta Dalal comment 3 years ago
Well, in the short term, we can save 10000 crore by throwing Essar back in the hands of the most reputed defaulters of India. Clearly, they don't have 54000 crore and only way to pay would be to take another loan of a similar amount from friendly bankers with a nice cut paid back. And then 10 years later it would have grown to 540000 crore with a string of gold plated expansions and then we will write off 270000 crore if not more. I would rather lose the 10000 crore today and throw these thugs in Cayman or Solomon or British Virgin Islands if that's where they want to go. Good riddance... we should rather do a one time settlement, pay all these thugs of India some money so that they can buy some other passport with it and drive these criminals out of this country and never allow them in ever again.

And Arcelor has already been forced to repay other bad loans of 8000 crore. So effectively the banking system has been saved of 50000 crore, not 42000 crore, despite all its own internal corruption. I would rather wish good luck to Arcelor who have been brave enough to step in where no one else would... they are walking on fire and the reputed goons will ensure they will fine enough land mines even if they are successful to regret this buyout for a long time. But anyway, that's Arcelor's business decision and good for us.
kiran
3 years ago
SBI is also going in for a fresh disaster in Jet airline in the bank's own tried,tested and proven Kingfisher way. No sensible person would agree that Jet can be saved by SBI. They are talking of total loans of Rs 8100 Cr but when all outstanding unpaid liabilities like fuel charges to PSU oil Co's, interest,lease rentals,TDS, taxes, Airport authority charges,PF, salaries arrears,others (all items unpaid) are added,the total over dues come to Rs 25000 Cr. God save PSU banks as no political party in power has ever got the political will to do so. The late venerable banker Mr Narsimhan who recommended to loosen Govt control in PSU banks in late 90's must be swerving in his grave and no-nonsense banker P J Nayak virtually crying day in and day out. Despite this reality, our business channels and analysts exhort investors all 24 hours to buy PSU banks showing rosy targets. Is it only for entertainment ?
Gupta
Replied to kiran comment 3 years ago
So true... the government should sell out all these rotten banks... Privatisation is not going to solve all ills, but it certainly will substantially shrink the deep rooted corruption at all levels in Banking. That is the direct result. The indirect result of a cleaner banking is far more powerful. Once we cut the money tap for crooked businessman, the lopsided competition that clean businessman face today wherein their competition doesn't have to repay loans will be gone. The crooks will not have the money to bribe all and sundry and will be out of business. The best way to give clean businessman access to money and opportunity is to stop the money flow to the corrupt... Sell the banking system out from govt hands and let the change begin.
Sucheta Dalal
Replied to kiran comment 3 years ago
Completely agree!
Vikramjeet Singh
Replied to Sucheta Dalal comment 3 years ago
The Sandesara source of funds can very easily be traced. They made their money in Nigeria, initially by a stroke of luck and then via financial engineering. Even there they are involved in massive frauds and are way behind their tax and royalty payments. In India the model was to take loans and siphon off the funds, in Nigeria the model is over-invoicing and get the same approved from the corrupt government officials. Indian investigative agencies, if they want to, can trace the source of funds in less than 24 hours. Its public information in Nigeria how they function and the manner in which the money is routed to Dubai. These guys were a much easier catch than a Vijay Mallya or a Nirva Modi. Agencies should have acted faster on these guys
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