In 2014, 91 companies were referred to BIFR for turnaround, compared with only 57 in 2008
More and more sick companies in India are using the Board for Industrial and Financial Reconstruction (BIFR) as an escape route to delay legal action by banks for debt recovery even as their loan restructuring under the corporate debt restructuring (CDR) cell and other such mechanisms fail.
The Sick Industrial Companies (Special Provisions) Act (SICA) 1987, under which BIFR was formed, forbids the lending bank taking the legal recourse once the companies are referred to the board.
In 2014, 91 companies were referred to BIFR for turnaround, compared with only 57 in 2008, according to data on BIFR’s website. In 2015, already 65 cases have been referred to the board till May-end, said a senior board official who did not want to be named.
The BIFR website does not give the debt of companies that have been referred to it.
“As soon as the restructuring package fails, we classify the account as an NPA (non-performing asset) and the bank would then initiate recovery proceedings against them. But BIFR is becoming an escape route since no legal action can be taken against a company that has been referred there,” said an executive director of a large public sector bank on condition of anonymity as the person is not allowed to speak to the media.
“As soon as the restructuring package fails, we classify the account as an NPA (non-performing asset) and the bank would then initiate recovery proceedings against them. But BIFR is becoming an escape route since no legal action can be taken against a company that has been referred there,” said an executive director of a large public sector bank on condition of anonymity as the person is not allowed to speak to the media.
SICA is a legal mechanism to deal with private and public sector industrial companies that are nearing closure.
Its main objective is to determine sickness and expedite the revival of potentially viable units or closure of unviable units, according to the introduction on the BIFR website.
When a case is referred to BIFR, usually the lead lender to the company is appointed as the operating agency and is asked to submit a viability report.
Based on the report, the board passes an order to decide the future course of reconstruction.
Bankers believe that though the mechanism was once helpful in dealing with industrial units, it has now outlived its utility and has become more of a hurdle to timely debt recovery.
The problem, says Babu Sivaprakasam, partner and head-banking and finance vertical at Economic Laws Practice, is Section 22 of the SICA, which prohibits any legal action against the companies referred to BIFR.
Bankers believe that though the mechanism was once helpful in dealing with industrial units, it has now outlived its utility and has become more of a hurdle to timely debt recovery.
The problem, says Babu Sivaprakasam, partner and head-banking and finance vertical at Economic Laws Practice, is Section 22 of the SICA, which prohibits any legal action against the companies referred to BIFR.
Many borrowers have misused this to buy time against their lenders, he says.
“Lenders have the ability to oppose the reference of any company to BIFR; and if the majority of lenders to a firm oppose it, the company will not be allowed to go through the process. However, since it is a legal matter, this decision takes some time to come and so recovery is delayed,” said the deputy managing director of another large public sector bank, who wanted to remain unnamed.
“Lenders have the ability to oppose the reference of any company to BIFR; and if the majority of lenders to a firm oppose it, the company will not be allowed to go through the process. However, since it is a legal matter, this decision takes some time to come and so recovery is delayed,” said the deputy managing director of another large public sector bank, who wanted to remain unnamed.
Debt restructuring had picked up pace between 2011 and 2015 due to increasing defaults in companies owing to a weak economy and delays in implementing projects.
The stress was largely led by the infrastructure and related sectors such as iron and steel, power, engineering and construction among others.
With a large number of cases being restructured, the number of failed restructurings—or failed exits as they are called in industry parlance—have also risen.
As on 31 March, the CDR cell had approved 530 cases with a total loan of over Rs.4 trillion for debt recast, of which 165 cases with loans worth Rs.56,995 crore had exited on account of failure in implementing the debt-restructuring package as approved by their lenders.
The number of failed exits as on 31 March 2014 stood at 121 cases, with loans worth Rs.29,980 crore. With an increasing proportion of restructured assets turning bad, the stress on the banking sector is expected to rise in the next few months.
Ratings agency India Ratings and Research Pvt. Ltd expects impaired assets (bad and restructured loans, outstanding receipts from asset reconstruction companies and discom bonds) to clock 13% of loans by March 2016 (9.1% in March 2014) and see a flatter trajectory thereon.
CSGAURAV +919990694230
[email protected] https://www.facebook.com/gauravdelhiravpage
Subscribe to CS GAURAV SHARMA by Email
