Come December, banks will have to grapple with the ethical and financial dilemma of dealing with failed promoters who try to claw back control in troubled companies — where they no longer call the shots — by trying to outbid others in the race.
Promoter shareholders who use shell companies or tie up with offshore funds (acting as fronts) to regain control can be blocked by lenders, the Reserve Bank of India, and authorities like the Ministry of Corporate Affairs on suspicion and charges of round-tripping and laundering.
But bankers fear they will be in a predicament when such promoters, fearing they would be left with no standing in the business community, attempt a direct entry by coming up with offers that are better than others.
“What do you do then? Very soon we will have to face the question. Do we act in a pure fiduciary capacity and hand over control to the highest bidder? Or, do we disallow men who had failed once from running the show again? With bidders submitting expression of interests and working on final bids it’s a question that is cropping up,” a top official of the largest Indian banks told ET.
However, in a recent case a state-run bank refused to back a debt resolution plan which involved bringing back the promoter while accepting huge loan haircuts (as high as 85%).
The company now awaits liquidation, which the bank in question believes is more acceptable than writing off most of the loans while letting old promoters walk back.
“Some criteria for evaluation of promoters have to be decided. Would some promoters be required to pay a risk premium given their track record? How much more? For instance, while calculating the present value of future cash flow (to the bank in the form of interest and loan repayment), the committee of banks should be in a position to ask for a higher discounting rate that what it would applicable for other double or triple-A rated bidders,” said the director of a large institution.
For a dozen distressed companies, the six-month window to find a debt rejig plan under the Bankruptcy Code, comes to an end in January when banks would figure out how things unfold: whether the National Company Law Tribunal (where insolvency petitions have been filed by financial creditors) give more time (a maximum of three months) to find a solution; whether a promoter moves the court when its bid is rejected; whether creditors with at least 75% of the outstanding loans agree to a plan.
Banks are hoping for a quick solution — at least for companies which, post insolvency, have stopped paying loan interest despite posting operating profit.
“Due to the fear of being categorised as a wilful defaulter, some of the steel companies were paying interest. With insolvency professionals taking over the reins, they have stopped,” said another banker.