Stressed Assets IBC A Sunrise Professional Opportunity Perspective

Stressed Assets & IBC “A Sunrise Professional Opportunity” Perspective By : CMA S. Rajat Naidu IBBI Registered Insolvency Professional

Stressed Assets Getting increased attention as trend of deteriorating asset quality has immerged as a big economic risk for Indian banking sector. Stressed asset is a powerful indicator of the health of a banking sector. What is Stressed Asset? Non Performing Assets (NPA) Loans where interest and / or installments has not been served for a period of 90 days. Restructured Loans a. ) A bad loan has been modified into a new loan. b. ) It was a past NPA. c. ) Restructuring includes extended repayment period, reduced interest rates, conversion of part of loan into equity or combination of above. d. ) The borrower repayment of modified loan is also risky and stressed. e. ) CDR , SDR and S 4 A are some of the method of restructuring a loan. Written off loans and assets Loans which the bank counts as non recoverable and needs 100% provisioning in its balance sheet

Indian NPA Scenario : Extent of Extreme The stressed assets in the banking system is nearly Rs. 11. 5 lacs crores which is about 14% of total advances. Public sector bank as highest stressed assets ratio of 13. 5% while in private banks it is 4. 6% of the total advances. Over 60% of stressed assets are in aviation, shipping, steel, cement, real estate and power. IDBI Bank ( 24. 11 %) and Indian Overseas Bank ( 23. 6% ) have highest NPA ratios while ICICI Bank and Axis Bank are two private banks who are among top 20 NPA banks. Stressed assets of Indian banks exceed their networth, says Mc. Kinsey report (May, 2017)

Factors behind Stressed Assets Crises Aggressive lending by Indian Banks during boom period of 2004 -08. Aggressiveness continues despite global meltdown in 2008 on optimizing that global crises will not affect India. By 2011, Indian economy was feeling the heat of an overbearing economic crisis. Crude prices shot up, Inflation surged but growth faltered. Interest rates moved up and demand crashed. Resulted in high budget deficits, prompting the government to reduce public spending. Situations worsened by mining ban and low cost imports. Industry-specific issues, such as issues peculiar to mining / infrastructure / textiles / aviation / iron & steel, to name a few, which added to the distressed asset issue within the banking sector

Some reasons for sickness of Corporates Out of Management Control Force majure Business Environment Business Cycle Promoters Locational Obsolescence Judgement errors Technological Shift Financial mismanagement

INSOLVENCY & BANKRUPTCY CODE 2016

Necessity for New Prescription- for – Old Disease Bill was passed by Lok Sabha on 05. 2016; by Rajya Sabha on 11. 05. 2016; got Presidential assent on 28. 05. 2016. To resolve disputes in Time Bound Manner. To promote entrepreneurship. To improve credit availability. To balance interest of all stakeholders. To minimize the role of adjudicating authority – Power to IP. To tackle around 12 old Laws – Some are 100 years old.

The Insolvency and Bankruptcy Code, 2016 (IBC) q Insolvency Resolution and Liquidation of Corporate Entities. q Bankruptcy of individuals and partnership firms. To Promote Entrepreneurship To Increase credit availability Objectives of the Code To balance interest of all stake holders To increase of doing business

Key Highlights Paradigm shift – from debtor in control to creditor in control. Strict penalties/prosecut ion for misuse, concealment, frauds. For the first time Government dues rank below the claims of creditors Clearly defines distribution process Key criteria shifted from “erosion of net worth” to “occurrence of default” All insolvency related matters under one law – complete code. Time bound process.

Initiation of Corporate Insolvency Resolution Process (CIRP) Application for CIRP by ü Financial Creditor (FC) [Sec 7(1)] - to whom a financial debt is owed (both secured or unsecured) or assignee. Operational rendered have services ü who goods or. Creditor – 9(1)] [Sec (OC) including workmen and statutory dues ü Corporate Debtor (CD)[Sec 10(1)]- The defaulting borrower Trigger Event ü In the event of default in payment of debt obligation (in case of FC) or non receipt of payment or notice of dispute within 10 days of demand (in case of OC)

Who Can’t initiate CIRP The following cannot initiate a CIRP process [Sec. 11] Ø CD already undergoing a CIRP Ø CD already completed a CIRP during past 12 months preceding the date of application Ø CD/ FC who has violated terms of a resolution plan which was approved 12 months before making such application Ø CD in respect of whom a liquidation order has been made

Information to be filed along with CIRP Application FC shall submit: ü Record of default committed by the corporate debtor ü Propose Insolvency Professional to act as IRP OC shall submit: ü copy of invoice or demand notice demanding payment within 10 days ü affidavit that there is no notice regarding any dispute by CD ü certificate from financial institution maintaining account of OC regarding nonpayment of dues CD shall submit: ü Books of account and such document relating to such period as may be specified ü Propose Insolvency Professional to act as IRP

Admission of CIRP, Appointment of IRP and declaration of moratorium ü Within 14 days of receipt of an Application for CIRP, Adjudicating Authority (AA) to take a decision about the admission of the case [S. 7(5), 9(5), 10(4)] ü Date of admission of application by AA shall be considered as Insolvency commencement date [S. 5(12)] ü Upon admission of application, AA by an order to declare a moratorium prohibiting filing / continuation of any recovery action against the CD / its assets including an action under SARFAESI Act. [S. 14(1)] – moratorium to continue till the completion of CIRP [S. 14(4)] ü AA (u/s 13) to appoint Interim Resolution Professional (IRP) (s. 16) within 14 days from the Insolvency Commencement Date: cause a public announcement and call for submission of claims by creditors of CD [S. 15]

CIRP PROCESS-1

CIRP PROCESS-2

CIRP-TIME LINES

ORDER OF PRIORITY-WATER FALL

Functions and Term of IRP ü To be appointed for a period not exceeding 30 days [S. 16(5)] ü Management of CD shall vest in the IRP and the powers of the Bo. D of CD shall be suspended [S. 17(1)(a) (b)] ü Collect information relating to the assets, finances and operations of CD for determining its financial position [S. 18(1)(a)(d)] ü Constitute Creditors’ Committee (CC) comprising only FCs [S. 18(1)(c)] ü Monitor the assets of CD and manage its operations as a going concern till the appointment of RP [S. 20(1)] ü The CC, within 7 days of its constitution, with a super majority vote (75%), appoint the IRP as RP or replace him with another RP to conduct the CIRP ü RP shall manage the affairs of the CD and prepare an Information Memorandum in the prescribed manner and circulate the same. ü Any person (Resolution Applicant) may submit a resolution plan to the RP ü RP shall examine the Resolution Plans to ensure its compliance as per the provisions of the Code

Formulation of Resolution Plan ü A resolution applicant may submit a resolution plan to the Resolution Professional to be prepared on the basis of Information Memorandum (IM) prepared by RP [S. 30(1)] ü RP shall present resolution plans before the CC for its approval. The resolution plan can also be submitted by the creditors or by the CC [S. 30(3)] ü Resolution plan to also provide for repayment of the operational creditors in the manner specified by the Board (IBBI) which shall not be less than what they would be paid in the liquidation of the corporate debtor [S. 30(2)(b)] ü The resolution plan consented to by 75% or more of the financial creditors in value terms is forwarded by the RP for the approval of AA [S. 30(4), (6)]

Essential contents of Resolution plan [S. 30(2)] The resolution plan should provide for: ü Payment of insolvency resolution process costs in priority to the repayment of other debts of CD. ü Repayment of debts of OC in such manner which shall not be less than the amount to be paid to OC in the event of liquidation of CD. ü Provides for the management of the affairs of CD after approval of the resolution plan. ü The implementation and supervision of the resolution plan. ü Should not contravene any of the provisions of law for the time being in force. ü Conforms to such other requirements as may be specified by the Board

Consideration of the Resolution Plan by the AA to approve the resolution plan in case the same is supported by the consent of 75% or more of the financial creditors and it meets the requirements of Sec 30(2) [S. 31(1)] In case the required support of financial creditors is not available, the Resolution Plan shall be rejected by the AA [S. 31(2)] CIRP is to be completed within a period of 180 days, however, with the consent of 75% or more of the financial creditors, AA may extend the resolution period by not exceeding 90 days [S. 12(1), (2) and (3)] In case, the CIRP not completed within the said time period, the CD is directed to be liquidated by the AA [S. 33(1)]

Approval and Implementation of Resolution Plan The resolution plan sanctioned by AA shall be binding on the CD, its Employees, Members, Creditors, Guarantors and other stakeholders involved in the resolution plan. [S. 31(1)] After order of approval of resolution plan, the moratorium order passed by AA earlier shall cease to have effect. [S. 31(3)(a)] For smooth implementation of the provisions of this code and also the resolution plan sanctioned by AA or any other order of AA, it has been provided that the provisions of this code shall have overriding effect, notwithstanding anything inconsistent therewith contained in any other law. [S. 238]

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 -23 Nov. 2017 The Ordinance inserted a new section -29 A which states A person shall not be eligible to submit a resolution plan, if such person, or any other person acting jointly with such person, or any person who is a promoter or in management control of such person – Is an undischarged insolvent. Has been identified as wilful defaulter in accordance with the guidelines of RBI. Whose account is classified as NPA…. and period of one year or more has lapsed from the date of such classification and who has failed to make the payment of all overdue amounts with interest thereon and charges relating to NPA before submission of resolution plan. Has been convicted for any offence punishable with imprisonment for 2 years or more. Has been disqualified to act as director under the CA, 2013 Has ben prohibited by SEBI from trading in securities or accessing capital market. Has indulged in preferential or undervalued or fraudulent transaction as per order of AA. Has executed an enforceable guarantee in favour of a creditor in respect of CD under resolution process or liquidation under this Code.

Impact of Ordinance Comes into effect immediately. Applicable to all cases where no resolution plan so far approved by AA. All cases which are NPA for more than 12 months. All wilful defaulters – excluded to bid for their assets or that of their companies or any one else. Keeping the toxics out! Applies to Guarantors Can the existing promoter participate in the resolution plan ? Retribution? ? We don't mind haircut but we don't want to be bald: SBI's Rajnish Kumar

Fast Track CIRP (Sec. 55 to Sec. 58) The code provides for fast track CIRP for certain classes of CD as may be notified by the Central Govt. [Sec 55(1)]- CD with assets / income below a certain limit as notified by CG- CD with such class of creditors/ amount of debt as notified by CG. Fast Track CIRP shall have to be completed within 90 days from Insolvency Commencement Date [Sec 56(1)]. The said period of 90 days may be extended by NCLT by not more than 45 days [Sec 56(3)]. An application for fast track CIRP shall be accompanied by the proof of default [Sec 57(a)]. 27

Opportunities as an Insolvency profession(IP) for CMA’s Under CIRP and Liquidation

New wave of opportunities for professionals particularly to Cost and Management Accountants Commercial & Business Knowledge Valuation Taxation Practical working knowledge for successful IP Company Law Banking & Finance Cash Flow Management Negotiation Skill Stakeholder Management Insolvency Law

Different hats worn by an Insolvency profession Interim resolution professional (30 Days) Resolution professional (150 to 240 Days) Liquidator (2 years to 3 years)

Roles and responsibilities of interim Resolution Professional Manage operation of the corporate debtor as a going concern. Public announcement. Appointment of registered valuers. Collection / verification and determination of claims. Collation of claims. Constitute a committee of creditors. Holding first meeting of Co. C. Preparation of partial information memorandum. Monitor assets of the corporate debtor. Determine financial position of corporate debtor. Collect all information relating to the assets, finance and operations of the corporate debtor.

Roles and responsibilities of Resolution Professional Conduct entire CIRP. Manage the operations of corporate debtor. Take immediate custody and control of all the assets. Preserve and protect the assets of the corporate debtor including continued business operations Represent and act on behalf of the corporate debtor including court cases. Raise interim finances subject to the approval of the Co. C. Update list of claims. Prepare information memorandum. Invite prospective lenders, investors, and any other person to put forward resolution plans. Providing access of information to resolution applicant. Check resolution plan for compliance with the code & present to Co. C. Submit resolution plan approved by Co. C to NCLT. Send copy of order of NCLT approving / rejecting resolution plan to participants and resolution applicants.

Roles and responsibilities of Liquidator To receive , collect and verify claims of all the creditors. To take into custody/ control and evaluate all the assets, property, effects and actionable claims of the corporate debtor- protect and preserve the assets & properties. Form and hold liquidation estate as a fiduciary for the benefits of the creditors. Carry on business for beneficial liquidation as necessary. Sell movable and immovable properties by auction/ private contract. Obtain professional assistance. To institute or defend suit. Investigate financial affairs of CD for undervalues/ preferential transactions. Apply to NCLT for orders and directions as required. Prepare preliminary report, assets memorandum, sale report etc. Maintain relevant records. Realise and distribute.

Additional Opportunities –As Professional Ø Valuer : As per IBC code IRP need to appoint two valuers to determine liquidation value. CMA with over 10 years of practice can qualifying to do valuation. Ø Preparation of Resolution Plan : CMA can assist resolution applicants in preparation of Resolution plan. Ø Due Diligence : As per code IRP need to collect all information relating to the assets, finance and operations of the corporate debtor for determining the financial position of the corporate debtor, including information relating to – - Business operations for the previous two years; - Financial and operational payments for the previous two years; - List of assets and liabilities as on the initiation date; and - Such other matters as may be specified. Ø Data processing : As per IBC code IRP and RP are needed to collate and verify claims of the creditors. In a large operating company data could be huge. IRP/ RP avail services of CMA for data processing.

Additional Opportunities (Cont. . ) Management of borrower : IRP/ RP are required to manage business of the borrower on a going concern basis. IRP/ RP may engage CMA and other professionals for assisting in management e. g. as CFO. Secretarial and legal work : CIRP process requires huge amount of book keeping, holding of meeting, recording minutes, communication with NCLT etc. IP are expected to take help of professional in this regard. Representing lenders : Any creditors who is part of COC are allowed to appoint other IP (other than RP ) as their representative in COC. FCCB and ECB holders are expected to use this facility. Representing before NCLT/ NCLAT : A party to any proceeding or appeal before the Tribunal or the Appellate Tribunal, as the case may be, may either appear in person or authorized one or more CMA to present his case before the Tribunal or the Appellate Tribunal. Forensic Audit : IBC provides for look back period of 2 years in case of related parties and 1 year in case of other parties. It might be needed to conduct an forensic audit in some matters wherein CMA can provide their services. Stock Audit : Most corporate Debtors enjoy working capital limits. It may be during the business under CIRP.

Challenges of the new Professional opportunity Only those who have appeared and cleared the limited Insolvency Examination or National Insolvency Examination are eligible to work as Insolvency professionals (IPs). In all of the situations, the IP has to take into consideration the interests of all the stakeholders involved , and not limited to financial stakeholders. During the interaction the IP has an opportunity to get a view from the various stakeholders and may be able to recognize the problems that may be plaguing the business which can be brought to the notice of the lenders and may help bring about a resolution. The IP may to negotiate terms of engagement with suppliers , financial partners, employees and workmen, apart from managing the business on behalf of the Committee of Creditors ( COC).

Challenges (Cont. . ) Due to the various responsibilities that an IP has to take on, it also provides an opportunity to look at a business from all angels, from deep within and holistically at the same time. IP will also have to keep itself updated on various matters relating to accounting standards, taxation, legal issues which allows the IP to gain rich knowledge. IP required specialized knowledge and staff to look after the assignments. IP’s present professional set up will require lot of efforts to keep up with the demands of this new professional segment. Hence, the opportunity and rewards brings in a lot of responsibilities on the shoulders of the IP.

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