Jet Airways vs Renuka Sugars: How Not To Handle a Bad Situation
In less than three years since it was promulgated, the highly touted Insolvency & Bankruptcy Act (IBC) is going the way of a dozen previous statutes that failed to fix our ‘bad loans’ problem. As always, regulators and courts have contributed to delays and confusion. 
 
The Rs42,000-crore bid by Arcelor Mittal for Essar Steel, which would have given the Modi government much to trumpet about, has run the gauntlet of multiple court proceedings over the past 600 days but is unlikely to get past the Supreme Court (SC) before a new government is installed at the Centre. 
 
India’s apex court itself is facing its worst credibility crisis, with a three-judge bench set up to investigate allegations of fixing by corporate houses and charges of sexual harassment against the chief justice. 
 
In May 2019, when the IBC completes three years of existence, about 40% of the 1,484 cases admitted for insolvency proceedings have been completed. Of these, only two cases—Bhushan Steel acquired by Tatas, and Electrosteel Steel by Vedanta—allowed lenders to recover significant sums. A few more steel and power companies could have been successful; but, like Essar Steel, they are still winding their way through the legal obstacle race. In most other cases, the recovery by lenders is 25% or much less. 
 
But the problem is not with the IBC process alone. The bigger issue is compromised lenders, political interference and confused regulators who remain silent when they should act and obstruct when they ought to facilitate genuine resolution. A leading banker is fond of saying, ‘regulation can be rule-based or based on principles—in India it is neither—it is person-based’. 
 
There are many examples of how this works, going back over the decades. But let’s look at two recent examples and compare government response, because we have been vociferously told, time and again, that ‘phone-banking’ is dead and this government believes in being hands-off and result-oriented. 
 
The Latest in Crony Capitalism 
Jet Airways is the classic case of crony capitalism; but Naresh Goyal’s gamble of arm-twisting the government into bailing him out again, failed. The wily Mr Goyal probably thought that the government wouldn’t risk the negative publicity and bad optics of 20,000 jobs lost when the election process had already begun. He got that right. Led by Rajnish Kumar, chairman of State Bank of India (SBI), the lenders had, indeed, structured a dubious deal which would have allowed Mr Goyal to re-enter Jet, after pretending to step down to facilitate a Rs1,500-crore cash injection, where banks acquired a 51% shareholding by converting one rupee of debt. 
 
The deal, proudly stitched together by SBI, was pure hogwash. Jet Airways, as it is now clear, has hardly any assets to justify the Rs8,500-crore debt that mainly public sector banks (PSBs) have lent, over the years. Many of its aircrafts are already secured through a first charge by other lenders, including the US Exim Bank. So what was the basis on which banks were planning to inject another Rs1,500 crore with nothing to collateralise? Why wasn’t Mr Goyal being asked to bring in more money? We, the people, have no answers. I now learn that constant phone calls from Delhi were pushing bankers to agree to this solution; but many of them dug in their heels and refused to sign off on fresh loans without written instructions. When nothing was forthcoming in writing, Jet Airways bit the dust—right in the middle of a high-voltage election. 
 
Let’s not forget that the Jet Airways’ situation was no different from that of Kingfisher Airlines, where IDBI Bank, probably succumbing to calls from Delhi, had lent money to Vijay Mallya against the non-existing good will of his airline brand. Kingfisher Airlines went belly up in 2012; but in 2017, under this very government, the former IDBI chairman and three other bankers were arrested. No banker was willing to risk a similar situation this time, doesn’t matter if PSBs stand to lose over 80% or more of the money that Jet Airways owes them. 
 
Shree Renuka Sugars
Now, let us look at Shree Renuka Sugars and how its promoter Narendra Murkumbi handled a bad situation. Once the poster child of the farm sector with global ambitions, the company piled up debt as well as losses after its international expansion soured and the sugar industry hit a bad patch. In 2014, the promoters brought in Singapore-based Wilmar International, a top Asian player in the agri-business, which acquired 27%. The promoters remained in control of Shree Renuka Sugars. 
 
However, the market regulator, SEBI (Securities and Exchange Board of India), treated it as a significant acquisition and asked both promoters to make an open offer to other shareholders. In 2017, the Murkumbis agreed to exit, to find a solution to the huge outstanding debt problem. As part of the deal, Wilmar invested another US$118 million and guaranteed the debt of Rs2,700 crore. Now, SEBI demanded another open offer on the grounds that there was a change in management control. This was done and entailed an outgo of another Rs800 crore or so. 
 
The debt restructuring was completed on 9 March 2018. Wilmar now owns 58% of the company, while Mr Murkumbi is non-executive director, with his family owning less than 1% of the equity. Under the 12 February 2018 circular of the Reserve Bank of India (RBI), this restructuring and change in control would have ensured that the account was no longer a non-performing asset (NPA) on the books of banks, since it was servicing its debt obligations on schedule. In fact, RBI inspectors had gone into the deal in detail in FY17-18 and found no problem with it. 
 
(Note: The relevant portion of the 12 February circular read: “In case of change in ownership of the borrowing entities, credit facilities of the concerned borrowing entities may be continued/upgraded as ‘standard’ after the change in ownership is implemented, either under the IBC or under this framework. If the change in ownership is implemented under this framework, then the classification as ‘standard, shall be subject to the following conditions.” All the conditions laid down were met in this case.)
 
So, here was a promoter who, unlike Mr Goyal, voluntarily relinquished control, in the interest of the company and his own debt obligations and facilitated a clean and amicable change of management. He also made two open offers, unlike Spice Jet, where, in a similar situation SEBI granted the new promoter, Ajay Singh, a discretionary exemption from making an open offer and did not even examine the deal closely. 
 
Yet, typical of India, this wasn’t good enough for our regulators. On 22nd March, RBI, without any provocation or new development suddenly wrote to all banks asking them to declare Shree Renuka Sugars as an NPA, on the grounds that there was no management change and Wilmar was already in the picture when the loans were bad. It also wanted them to initiate recovery proceedings. 
 
But wasn’t Wilmar brought in precisely to mitigate the bad loan issue? Also, if there was no change in management, why did SEBI ask the company to make a second open offer when its stake went up to 58% and it stepped in to guarantee loans? When there is a formal mechanism for coordination and cooperation between regulators, what explains the divergence in views between two powerful regulators, or RBI’s capricious action? 
 
Also, remember, RBI has been complicit in the massive rise in bad loans of Indian banks, and was also sleeping over the rising debt of a systemically important group like IL&FS (Infrastructure Leasing and Financial Services), yet, it has the temerity to make a capricious U-turn in the Shree Renuka Sugars to harm a potential turnaround on specious grounds. RBI’s irresponsible action affects the business and borrowing prospects of Shree Renuka Sugars and also hurts banks, investors, employees and farmers; but who will hold RBI accountable? 
 
A defiant RBI even had a top official, Arun Pasricha, issue a media clarification. He ignores the sequence of events at Shree Renuka Sugars and writes, “As Wilmar was a party to the default by virtue of holding 38.57 per cent of the equity of Shree Renuka Sugars, it stands disqualified as an acquirer under the IBC.” Wouldn’t it have been wonderful if RBI had exercised such strict, one-sided, diligence to rein-in IL&FS, which ran as a one-man fief under Ravi Parthasarathy, before it collapsed? Where was its wisdom and intervention, even recently, when banks were hatching a strange bailout of Jet Airways?
 
According to media reports, an angry Wilmar had planned to drag RBI to court; but the company has denied these reports. Any litigation in India is long-drawn, expensive and, often, self-destructive; and dragging the regulator to court is even worse. 
 
As I said earlier, Indian regulators do not operate on principles or rules; so their actions differ from one entity to another. Will RBI dig in its heels again and set itself up for another defeat in court or show the sagacity to re-examine its flawed action for the greater public good?
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    COMMENTS

    S T PATIL

    4 months ago

    Compliment you for excellent analysis and thought provoking article.Hope your efforts will catalyze the process of making Regulators accountable.

    Braj Pratap Singh

    4 months ago

    Word of wisodm :- Regulators always remain silent when they should act and obstruct when they ought to facilitate genuine resolution be it either RBI, SEBI, IRDA. And their ego uff far above the clouds.

    A comprehensive and incisive article.

    RAMA SRINIVASAN

    4 months ago

    Question should be raised in Parliament.

    B. KRISHNAN

    4 months ago

    This is another incisive article from ML. RBI is known for locking the stable after the horse has bolted, but in the case of Renuka Sugars it doing the reverse..preventing the horse from coming back! The height of their stupidity is only matched by their arrogance! Time to tame this "rakshasa" is highly overdue. Hope someone (like Seshan tamed the EC) will do an "avatar" for this purpose!

    Prasanna

    4 months ago

    RBI needs to evaluate very proposal in the larger interest of the country. Its priority should be in making the assets productive and also recovering the loans given by banks. Was that happening in the process followed in Shree Renuka Sugars? If yes, then why stop this process based on its own views based on its own Circular. These views appear to be flawed if they come in the way of a process which has made assets productive and has ensured recovery of bank loans. Is not RBI accountable for good governance to the people of this country?

    Barjesh Singhal

    4 months ago

    We always need to see what is right and not who is right.
    Timely and swift action is must to sort out financial issues.

    David M. Thangliana

    4 months ago

    Great article. Despite I'm not an economics student nor financial expert, it is very clear even to the layman that RBI needs a good rehauling

    Anil Kumar

    4 months ago

    Well written. Will be interesting to read an article on Recovery Professionals who head these processes and how their role / decisions impacts how smoothly or otherwise the process goes. Good performance should be highlighted.

    AAR

    4 months ago

    On the IL%FS debacle, you are only focusing on RBI short comings. I bet Finance Ministry IAS officers would have helped Ravi Parthasarathy a lot but those guys always escape with their loot.

    REPLY

    Sucheta Dalal

    In Reply to AAR 4 months ago

    Do read our entire series, you can click on the right hand column or here: https://www.moneylife.in/economy-and-nation/ilfs-mess

    There is plenty on IAS and others!

    SURAJIT SOM

    4 months ago

    Quite honestly, there may be a simple explanation. As they say ,keep it simple ....... When there are a few suitcases , no problem. When they are missing ......., well you know !!!

    DrRajesh Bheda

    4 months ago

    IBC has made only lawyers happy because we love litigation. Unfortunately we don't have a listed firm in this space

    Maruti Suzuki to phase out all diesel cars from April 2020
    Automobile major Maruti Suzuki will stop selling all diesel fuelled cars from April 1, 2020 as new emission norms kick in from next year.
     
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    "Diesel cars of BS-IV have to be sold and registered before 31st March (2019). We will work on our production schedule in a way that no diesel IV vehicle is left in our stock.
     
    "From April 1, 2020 we will not be selling diesel cars," he said. 
     
    Currently, diesel powered vehicles constitute about 23 per cent of the total domestic sales. The company had developed a new DDiS 225 (1.5L) diesel engine.
     
    At present, the company offers diesel variants of Swift, Vitara Brezza, Dzire, Ertiga, Ciaz, Baleno and S-Cross.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    IL&FS' operational creditors seek renewal of bank guarantees
    Operational creditors of IL&FS on Thursday filed an application at the National Company Law Appellate Tribunal (NCLAT) seeking renewal or extension of some bank guarantees which have lapsed.
     
    The appellate tribunal adjourned the case till April 29, 2019.
     
    According to Section 5(20) of the Insolvency and Bankruptcy Code (IBC), an operational creditor is "any person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred". They may include credit for goods and services.
     
    In its previous hearing on April 16, the bench headed by Chairperson, Justice S.J. Mukhopadhyay said that IL&FS should distribute funds to small creditors, in a manner that 80 per cent of their entitled amounts are paid.
     
    On Wednesday, the Reserve Bank of India (RBI) directed the banks and financial institutions to disclose their outstanding to IL&FS and its group companies including provisioning required as per income recognition and asset classification (IRAC) and actual provisioning made against NPAs.
     
    The circular gains significance as NCLAT's February order had said that "no financial institution will declare the accounts of 'Infrastructure Leasing & Financial Services Limited' or its entities as 'NPA' without prior permission of this Appellate Tribunal". 
     
    The RBI, however, has since then contested the view and said that banks should classify the accounts of IL&FS and its companies as NPAs.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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