Extended disputes hamper India’s new bankruptcy law
The successful resolution of about $210bn in stressed loans is crucial to Prime Minister Narendra Modi efforts to clean up the balance sheets of state-run banks
Mumbai/New Delhi — India’s new bankruptcy law is being bogged down by bitter courtroom disputes that include ArcelorMittal and the Tata Group, in a country famous for its sluggish legal system.
None of the 12 large debtor companies that the central bank forced into bankruptcy court in June have been sold yet. The National Company Law Tribunal (NCLT) in charge of the process, has extended a 270-day deadline enshrined in the law for Bhushan Power & Steel and Essar Steel India by excluding the days under litigation. Others may follow as the courts are inundated with appeals from founders, administrators, lenders and bidders.
The successful resolution of about $210bn in stressed loans is crucial to Prime Minister Narendra Modi efforts to clean up the balance sheets of state-run banks, which hold nearly 90% of impaired assets. The first 12 large cases are being closely watched to gauge whether India can hasten the pace of bad-loan recovery, which the World Bank puts at 4.3 years, ranking the nation at 103 for resolving insolvency.
"Discretionary extensions run the risk of setting a dangerous precedent, driving a hole through the very integrity of the code," said Ran Chakrabarti, a New Delhi-based finance lawyer and partner at IndusLaw. Should the courts water down the 270-day period, "we’re back to square one, and any hope of a swift liquidation process and an efficient recycling of capital — the very point of any insolvency law — will go out of the window." In what was seen as an initial success for the law, Electrosteel Steels was awarded to billionaire Anil Agarwal’s Vedanta. The hurrah was short-lived as the process has now been stalled by a court order following an appeal by a rival bidder.
The company tribunal has repeatedly postponed a verdict on a bid for Monnet Ispat & Power by JSW Steel and Apollo Global Management-backed Aion Capital Partners. Tata Steel is waiting on final approval for its purchase of Bhushan Steel, even as it appeals against an order allowing a late bid by Liberty House Group for Bhushan Power. ArcelorMittal and a VTB Capital-backed consortium are in court over Essar Steel.
Based on the US experience, it seemed "perfectly predictable and, in fact, necessary" for there to be a period of many years during which India’s bankruptcy rules are worked out and refined, Adam Feibelman, a professor at Tulane University Law School specialising in bankruptcy law, said in a March 29 e-mailed response to questions.
Beyond the 12, the fight for Binani Cement is also emerging as a test case, with a consortium backed by Bain Capital Credit slugging it out with billionaire Kumar Mangalam Birla’s UltraTech Cement. While the former had the winning bid under the bankruptcy process, Birla’s company made a late counteroffer and then signed an agreement with Binani’s founders to buy the asset.
The matter has been taken to an appellate tribunal and the nation’s supreme court before being referred back to the lenders’ committee.
"If in nine months you can’t get a resolution done then you’ve failed the law," said Shardul Shroff, executive chairman of law firm Shardul Amarchand Mangaldas, which represents one of the Binani suitors. "The battle for victory is not the end game for resolution plan, reviving the company is. Therefore, tribunal should avoid getting caught up by challenges and attempts by losing bidders to somehow or the other get back into the game."