Restructuring & Turnaround – Indian Scenario

1. Restructuring & Turnaround –Indian Scenario IAIP Speaker Event The Indian Habitat Centre, Habitat World, New Delhi, December 28, 2013 Presented by: Sajeve Deora, FCA Director, Integrated Capital Services Ltd. Member of

2. Available Forums • Borrower Side • Section 391 of Companies Act, 1956 / Section 230 of Companies Act, 2013 • Sick Industrial Companies (Special Provisions) Act, 1985 / Section 253 of Companies Act, 2013 • Corporate Debt Restructuring • Lender Side • Recovery of Debts Due to Banks and Financial Institutions Act, 1993 • Securitisation and Recovery of Financial Assets and Enforcement of Security Interest Act, 2002 • Winding up, Companies Act • Title of assets carry the baggage of business, impairing value of security. • Both Sides • Holding-on operations • Bilateral actions • Arbitration

3. Issues before Corporate Borrowers • Group company guarantee for borrowings / business transactions / statutory obligations, collateral tangible security, negative lien on intangibles. • Default in business continuity obligations assumed pursuant to incentive plans / schemes causing forfeiture of operating businesses. • Crippling of operations due to delay in payment / unsettled disputes with large customers, including State Enterprises (also competitor in market place). • Title of assets carry the baggage of business, impairing value of security. • New money inferior to old money. • Call and Put Options not fully recognised. Options held by foreign companies considered as borrowings, making them subject to exchange control regulations. • Brownfield purchases / restructuring coupled with control subject to approvals, amongst others, of Lenders, Contractual Restrictions, Foreign Investment Promotion Board, Securities Exchange Board, Competition Commission.

4. Issues before Lenders • Lenders have choice of recovery through Debt Recovery Tribunal or collective action to repossess security. • Maintain security ingrained in assets during recovery process. • Priority of payments on realisation of security. • Foreign borrowings can be utilised for assets creation and not to repay borrowings from Indian Banks. • Decisions of State owned banks are subject to scrutiny. • Restricted in tailoring lending / restructuring, and want to maximise recovery. • Personal loans for agriculture, consumer goods, education suffer from adequate security. • Sensing trouble, unsecured lenders initiate Arbitration / Winding up actions, and stall restructuring / implementation thereof leading to serious conflict in debt management and operations. • Emergence of Micro lending platforms, Self-help groups, Co-operative banks, Non banking companies, Not For Profit organisations, Sharia lending, resort to legal action.

5. Recent Changes • Restructuring under SICA based on objective of protecting employment, and restricts applicability to industrial companies. • Co-existence of SARFAESI, DRT, CDR and Companies Act. • Global order is shifting to Pre-packs. • Cancelled business and operational licences • RBI’s approach: • Lenders may consolidate debt. • Lenders acquire real estate in debt settlement. • Penalise erring lender. • Discover incipient sickness. • Companies Act, 2013: • Reporting in case of a debt defaulter. • Role of Administrator and Creditor Committee. • BIFR and Operating Agency process shifting to Consultative process. • Single forum for restructuring on stand alone situations, debt defaulters, winding up, as latter follows failure of restructuring.

6. Asset Reconstruction Companies • Specialised enterprises licensed and regulated by RBI. • Transfer of distress debt from banks to ARC’s based on electronic bidding. • ARC’s can: • Invite foreign ownership upto 74%. • Trade debt. • Swap debt to equity. • Taking over of Management for limited period. • Security Receipts, pass through trust certificates, are means of payment by ARC’s. • Foreign Institutional investment permitted in Security Receipts. • Operational Turnaround Restructuring – The New Order • New money is the key, Not forthcoming from ARC’s • CRO and Management Teams for Restructuring

7. Interesting Situations • Spread of foreign banking institutions expected to change corporate lending. • Guarantee for Loans for Long Term Project Finance. • Promotion of Corporate Bond market, Reducing role of State Enterprises. • Debt consolidation and follow-up SBLC’s. • Directions for time bound release of farmer dues and commencement of in-season operations by sugar mills. • Restructuring of: • Wockhardt Sale of Nutrition Division and Hospitals, New Preference Shares, Reduction in Interest rate Losses on Derivatives converted into NCPS, OCPS. • Suzlon Debt to Equity Swap, Fresh Working Capital, Moratorium on Interest and Extended Period for Repayment of term debt. • Distress Asset Funds • Swift action by State to place independent control over: • Satyam Software Ltd. • National Spot Exchange Ltd.

8. Personal • Persons having beneficial interest in the borrower offer personal guarantees and collateral security of their assets. • Lenders insist collecting post-dated cheques from borrower, when returned uncollected attract criminal liability on signatory / person in-charge of borrower. • Reporting defaulters and willful defaulters, Shaming defaulters through media. • Recourse by banks is enforced through DRT, competent to pass decrees and execute the same against personal assets. • Recovery of unpaid taxes is through attachment of assets and issuing garnishee orders. • Courts enforcing recovery competent to impose travel restrictions. • Individuals sparingly use statutory provisions to obtain declaration of bankruptcy. • Protection is available to property under, Insurance with Married Woman’s Property clause, Hindu Undivided Family and Public Provident Fund.