Distress in India

Having capital in an insolvent business can be a painful experience for anyone, but spare a thought for investors tied up in a bankruptcy in India. Ranked 136th out of 189 countries by the World Bank when it comes to dealing with insolvency, the average time to a resolution is four-and-a-half years. This compares with a year in the UK and just nine months in Singapore, according to KPMG.

But some comfort may finally be at hand now that the Indian parliament has finally passed the country’s first national bankruptcy law.

Previously, creditors were faced with a fragmented regime where decisions were often stayed or overturned by judicial forums with overlapping jurisdictions. The system was particularly abused by corporate debtors seeking to extend the lifespan of their badly-run businesses. Now, it is hoped, a new bankruptcy code will consolidate existing frameworks into one structure.

“If you go back to the genesis of the bankruptcy code, the issue is that there have been lots of proposed laws, but none of them has been implemented,” says Nikhil Srivastava, a director at alternative assets firm KKR.

“The new code has the right intention: it focuses on shortening time frames, on reducing independence on the legal system and on getting the pieces in place for results to play out in the required time period.”

According to Shailen Shah, a director at financial services firm KPMG, the most common reaction from offshore lenders is: why has it taken so long to come to a resolution?

Previously, there was no legal time limit on corporate and strategic debt restructurings (known as CDR and SDR mechanisms) in insolvency proceedings. The new regulation offers a deadline within which the debtors’ viability can be assessed and a resolution process agreed within 180 days.

“Currently, there are all these multiple tracks of negotiation happening. Whereas, with the bankruptcy code, all of that can happen under one umbrella,” says Rajiv Gupta, partner at law firm Latham & Watkins.

Traditionally, Indian insolvency regulations have discriminated against foreign investors. Companies often prioritise negotiations with domestic lenders, which have the lion’s share of the debt, and it is not unusual for foreign bondholders to find out that negotiations have taken place after a decision has been made. The only seat given to overseas lenders is at the winding up proceedings.

The new law will empower all classes of creditor by giving everyone a seat at the table to voice their concerns and offer resolutions. Every creditor also has the right to trigger a resolution process in case of a valid non-payment claim.

“The companies/debtors are looking at regulations more carefully than they did in the past. So it is good because they now have to take more responsibility,” says Rajiv Kochhar, chief executive of Avista Advisory, an investment banking firm.

Today, the system is skewed towards debtors and when creditors are not paid, they have limited ability to act. Under the new code, the power to proceed with insolvency proceedings has been transferred from debtors to creditor committees. This protects the creditors by giving them an absolute right to revive or liquidate the company.

Once the bankruptcy process has started Asset Resolution Companies (ARCs) can approach the insolvency practitioners to take over the debt straight away. Under the new code, a decision has to be made one way or the other within six months, meaning ARCs, with their funding ability, are seen as a potentially good solution.

However, problems remain. Despite a re-balancing of power from debtors to creditors, rights for foreign bond holders have not changed.

“Even if you have a seat at the table, you don’t have much power,” points out Gupta.

All decisions have to be taken by a 75 percent majority vote in a creditor committee and Indian banks remain the biggest creditors in most defaulted companies, meaning they will determine the actions taken.

“In some way the experience of sitting in that room goes a long way in addressing concerns for minority debt holders. That’s still a better development than with the multiple tracks where you don’t even get to interact with the majority of debt holders,” Gupta says.

“This is all new, so we need to see to what extent it actually come into practice and how many times the law is actually used after all. This is because the first step for the creditors is usually voluntary debt restructuring and negotiating with the company.”

The speed of resolving insolvency depends on the attitude of the majority – in most cases, banks. Most are reluctant to declare a non-performing loan as it means admitting a loss.

The banks are also still likely to decide the resolution even if the new bankruptcy code is deployed, leading to fears that the code will essentially be a continuation of the “extend and pretend” strategy.

Consequently, the opportunities for ARCs or foreign investors eyeing the Indian restructuring market could be limited.

Shah remains optimistic, however.

“Given the enhanced rights given to creditors and foreign creditors alike, we will eventually work towards a market where the bond holders will actually have more decision-making ability than a bank, and it might not lead to a clampdown on some of the minorities,” he says.

A comprehensive architecture to support the law is an essential requirement and insolvency professionals, information utilities and adjudicating authorities will have to be put in place.

“I don’t think the market is in a hurry. People are going to be sceptical in the beginning, so you will see this play out in the longer term. I think you will see some promoters taking action, but for the market generally to develop it will take more time,” says Srivastava.
“Passing a new code is the first step. Ultimately, the goal will be to set up a well-functioning debt market where companies can raise capital from multiple sources rather than the existing banking infrastructure.”