Bankruptcy Restructuring in India

29 November 1999

KISHORE SONI Chief Executive SONI INDUSTRIAL RESTRUCTURING CONSULTANTS NEW DELHI

Insolvency Regime in India

Concept of industrial sickness Sickness worse than Bankruptcy- defined based on net worth and not by debt default Sick Industrial Companies (Special Provisions) Act, 1985 - SICA Board for Industrial & Financial Reconstruction (BIFR)

BIFR PROCEDURE
References received Registered

(3806)

Registration decline

(2700)
Inquiry

(1082)

Recommended for closure

(637)

Rehab.scheme sanctioned

(657)

Dismissed

Monitoring

(476)

Failed & reopened

(249)

Discharged on revival

SICA definition -- its problems

Either SICA catches it too late Or, companies fudge accounts to get shelter under BIFR Reference
Net worth

Default starts here SICA catches here

Years

SICA definition -- its problems

BIFR either identifies extremely sick firms or mistakenly declares non-sick companies as sick Asymmetry between lender and borrower -- at the expense of lender
Lender: NPA after 180-days default Borrower: NPA after net worth 0

BIFR delays: Jan 97 to Mar 98

1825 1460
Days lost

1664

1095 730 365 0 Sanctioned

1468

Winding-up

Jul 87 to Jul 92: Mean delay: 851 days Jan 97 to Mar 98 Mean delay : 1664 days

Pending cases at BIFR

180 160 140 120 100 80 60 40 20 0

166

15

10

11

14

20

10

27

25

33

19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97

As of 1999

Where does BIFR stand?

Objective: bad managers, like bad currency to be kept out of circulation Facts speak otherwise 1229 Total cases disposed 94 (8%) Mergers Change in management 39 (3%)

Where does BIFR stand?

Automatic suspension of all legal proceedings Average delay: > 3 years More than 18% got illegitimate stay till the case got rejected Debtor in possession

APR violations then and now

Then.. . Fudged revenues to get DSCR > 1.33 7-10 year sacrifices Secured creditors taking hits to help equity Now One-time settlements Debtors still squeeze the creditors on OTS Creditors want to book profits and, so take hits for

Agenda for Reforms

Early detection Speed Voluntary references Facilitation and quick arbitration

Towards a new SICA

Definition to be altered to debt default Onus on company Time bound negotiations If negotiation fails, referred to BIFR Appointment of administrator by BIFR Invitation for a two-part bid Creditors vote on the bids

An alternative
Debt default Go to BIFR Negotiate with secured creditors Fails 30

Appoints Limited administrator. 120 stay Orders sale of Two-part bid company I Due diligence Creditors Best part II short-list part II bid wins I bids

Succeed s 60-90

A Caveat
Indian law requires liquidation by courts which confirm the Hindu belief that there is life 45 41 after death
30 27 19 15 13

Up to 10

10 to 20

20 to Above 30 30

Reform or Perish...
No. of references to BIFR shooting up since 1996
450 400 350 300 250 200 150 100 50 0 370 400

233

97

1996

1997

1998

1999

Reform or Perish...
Bank credit in sick industries increased by 14% to Rs157 billion as on March 1998 NPAs at Rs586 billion as on March 1999 This massive gap demonstrates urgency for quick reforms of bankruptcy laws