Banks have got accustomed to swallow the bitter pill in bad loan cases and the level of recoveries is no reflection on the avenue availed, whether it is the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SAFAESI) Act, 2002 or corporate insolvency resolution process (CIRP) under Insolvency and Bankruptcy Code (IBC). It is largely the result of poor underwriting. Thiru Arooran Sugars Ltd (TASL) is the latest in the list of a pathetic recovery of debts by the banks.
The company that owned 8,500 tonnes of cane per day (TCD) crushing capacity between its two plants in Tamil Nadu and Andhra Pradesh, together with 60 kilo litre per day (KLPD) distillery and captive generation of about 40MW, was referred to the CIRP under IBC by the banks in 2019. The approximate liabilities admitted in the CIRP was about Rs1,580 crore, essentially bank loans of Rs1,454.58 crore and dues to operational creditors and others, including employees, farmers, and unpaid provident fund (PF) dues.
The shocking revelation is that even as per the records, about Rs1,000 crore of bank loans was categorised as unsecured. IDBI Bank, Canara Bank and Punjab National Bank (PNB) each had well over Rs100 crore under this category. The presence of Canara Bank in this list is most surprising as IDBI and PNB have a formidable reputation of getting conned time and again!
The company was incurring losses from the year 2013-14 itself and it is not clear as to how the account was being handled from then on and why the CIRP was commenced only in 2019 when the law had come into force in 2016. Quite possibly the company kept stringing stories of recovery like most discredited corporates, who caused the run of bad bank loans over the last decade or so.
Initially, the National Company Law Tribunal (NCLT) had ordered liquidation of the company. During the process, KAL Distilleries Pvt Ltd, a relatively new face from the hinterland of Tamil Nadu, emerged to take over the undertaking of TASL under an amalgamation scheme formulated jointly under IBC and the companies Act 2013.
KAL has successfully completed the takeover of a fully integrated sugar mill with distillery and huge land bank and accompanying assets at a throw away value of Rs145 crore as settlement to the creditors and Rs110 crore infused as fresh cash into the company.
The quantum and manner of settlement of the banks’ exposures matches some of the worst settlements that have drawn the public ire of the IBC process as in the cases of Videocon, and Jet Airways.
Even at the overall level the recovery is under 10% but the recovery for the banks has plumbed new depths and makes a mockery of the arithmetic of insolvency recoveries.
The unsecured bank loans of about Rs1,000 crore is settled with a princely sum of Rs4.99 crore! This amount is paid over four quarterly instalments!
For example, in Canara Bank, which is popularly viewed as a better managed public sector bank (PSB), the amount that will be received over four instalments amounts to an incredible sum of Rs58 lakh against an outstanding of about Rs115 crore. The recovery constitutes about 50 paise in Rs100!
The bank may be spending more as management cost in doing this than the amount recovered. The same applies to the rest of the pack.
The secured lenders get Rs80 crore over a five-year period against Rs458 crore of outstanding!
The IBC lawyers and consultants get a far higher amount (Rs8 crore plus an unquantified liquidation cost) than all the unsecured bank lenders do! This may be setting a new dubious benchmark in this field.
The banks go scot free yet again, with little accountability for cavalier lending. The board and the chairman and the rest of the management fail to take ownership to find a suitable buyer, and rely on raw IBC professionals, who have little ability to locate strategic buyers for such assets. It is most surprising that no big player in the sugar industry took a look at this proposal.
The scheme of amalgamation will deliver significant tax benefits to the acquirer as all the losses which will arithmetically amount to the net loss to all the creditors of about Rs1,580 crore less than the settlement of Rs145 crore, or Rs1,435 crore. Taking a 27% tax rate, the benefit shall be around Rs385 crore, which is 150% of the total cost incurred by the acquirer of Rs255 crore being Rs145 crore to settle creditors and Rs110 crore infused into the company.
There could not have been a sweeter deal to any acquirer even if the sugar mill is moth balled and sold as scrap as global steel prices are touching new highs!
And banks swallow mouthful of ashes and gulp it with a glass of ethyl alcohol that the distillery will churn out very soon!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)