Why RBI Picked These 12 Accounts For Insolvency Action: BQ Explains

What made RBI select these 12 accounts for insolvency proceedings...

(Source: BloombergQuint)
(Source: BloombergQuint)

The Reserve Bank of India, in a rare move, has directed banks to refer 12 large corporate accounts for resolution under the Insolvency and Bankruptcy Code. BloombergQuint on Friday reported the names of the accounts, which make up nearly a fourth of the Rs 7.7 lakh-crore bad loans on the books of Indian banks. Why were these 12 accounts chosen? BQ explains the reasons based on conversations with bankers involved in the resolution process...

1) Essar Steel

The company is one of India's largest stressed asset cases, with total debt worth approximately Rs 45,000 crore, which includes dues to domestic and international lenders. Essar Steel was burdened with debt after a downturn in steel prices and a troubled expansion plan. The steel major has been trying various ways to reduce its debt, including restructuring plans and finding a financial investor. However, these have not worked.

2) Monnet Ispat & Energy

The Delhi-based steel company has faced a severe financial crunch owing to the drop in commodity prices and huge steel imports from China. This led to the company's debt ballooning to nearly Rs 12,500 crore. Lenders invoked the strategic debt restructuring (SDR) scheme to convert the company's debt into equity in August 2015. But they have failed to find a new investor for the company.

3) Bhushan Steel

In August 2015, the Central Bureau of Investigation (CBI) arrested the company's vice chairman Neeraj Singhal in a cash-for-loans scam. This was also around the time that banks were beginning to recognise the large scale debt of the company worth nearly Rs 40,000 crore as a stressed asset. The reasons behind the stress include falling commodity prices and over-leverage for expansion. A joint lender forum (JLF) called by large lenders including Punjab National Bank Ltd. and State Bank of India Ltd. (SBI) has been trying to resolve the various financial issues ever since, with little luck.

4) Bhushan Power & Steel

The Kolkata-based steel company, currently being run by Sanjay Singhal, has been under stress since the same time that Bhushan Steel has been. The debt size of both these companies is comparable and the reasons for stress in the two firms are similar. Lenders have been trying various measures to resolve the debt in the company, including changing management and implementing the RBI's scheme for sustainable structuring of stressed assets (S4A).

5) Era Infra Engineering

With approximately Rs 6,000-crore debt, the company has been struggling for many years now as it had originally featured in the list of firms that was admitted under the corporate debt restructuring (CDR) scheme in 2013. While the restructuring under CDR has failed, lenders have been attempting to resolve the debt using some other resolution schemes. A corporate debtor to the company, Prideco Commercial Projects Pvt. Ltd., had filed a case under the Insolvency and Bankruptcy Code at the National Companies Law Tribunal. The court has appointed an interim resolution professional in the case on April 12.

6) ABG Shipyard

This is another stressed company which has been in the news since the days of CDR in 2013. Shipyards were another sector, apart from steel, which suffered severe losses after a drop in trade using the sea route. After an unsuccessful exit from the CDR cell, the promoters of the company have been attempting to sell majority stake to investors across the world. The company has been in the news for a potential sale to international investors twice. Neither has been concluded.

7) Jaypee Infratech

A Jaypee Group company, which has been struggling to meet repayment deadline after its construction of the Yamuna expressway, faced multiple delays and cash-flow problems. This has led to the company's debt ballooning to over Rs 10,000 crore. Over the course of restructuring the debt, banks have taken control of parcels of land owned by the company in exchange for reducing debt.

8) Amtek Auto

After defaulting on debt owed to bondholders in 2015, Amtek Auto became a stressed asset for banks as well. With nearly Rs 14,000 core worth of debt awaiting repayment, lenders have been trying to push the company to sell some assets and reduce the burden. The maker of automobile parts had agreed to sell a significant stake to financial investors and reorganise its business. However, this hasn't moved as planned.

9) Alok Industries

A textile company which has been reeling under the burden of high debt in a slow-growing sector. Lenders to Alok have been trying to invoke the S4A scheme in the company to take out about half of the company's debt into their investment books, while letting the company service the debt. However, since the company does not meet the norm of 50 percent of its financial obligations being payable with the current level of cash flows, lenders have not been able to invoke S4A.

10) Jyoti Structures

Owing to the pressures emanating from the power sector, this company has struggled to clear its debt to domestic lenders. Moreover, a failed international business has also put a severe financial strain on the parent company. Last year, the lenders to the company had invoked SDR in a bid to sell a majority stake in the company to a bidder. This led to some initial interest from a few power transmission companies, but there was no sale.

11) Lanco Infratech

The Hyderabad-based Lanco group and its various Infrastructure businesses have been a victim of the slowdown in the Indian economy and issues such as environmental approvals. Lanco Infratech, the flagship company of the group, has been at the centre of the stress and lender action. The company had originally planned to sell its assets and reduce its debt burden. However, in 2015, the company's management said that the sales had been postponed due to low valuation. Lanco Teesta Hydro Power, the company's hydro power unit in Sikkim, was the first company in which lenders invoked SDR in August 2015.

12) Electrosteel Steels

The Kolkata-based steelmaker has been one of the most discussed steel firms in the Indian banking system. After a default in early 2015, the company became one of the first few to be subjected to action under SDR by the lenders. Following this, the company had also come very close to a sale to a UK-based financial investor. However, the sale did not complete as lenders questioned whether the buyer was fit and proper. Moreover, there were doubts raised about the sale after the company's business relations with the buyer in the past came to light.

Essar Steel, in an emailed statement, said the company has not received any notice from its lenders. Spokespersons at Era Infra, Bhushan Steel and Jaypee Infratech weren't immediately available for comment. The rest did not respond to BloombergQuint’s queries.