The Insolvency and Bankruptcy Code, 2016 (IBC) is one of the most well-intentioned and ambitious pieces of economic legislation passed by the government.
The objective of the Code can be said to be:
“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.”
Diverse industries are it cement, infrastructure financing, steel, housing, or jewelry are facing hardships, and about Rs 10 lakh crore stuck in debt in them created a lot of financial stress to their creditors.
“IBC has been framed keeping in mind two stated objectives; one is faster resolutions and the second is value maximization, and all this in a time-bound way. It bestows the creditors the much-needed right to initiate an insolvency process against any defaulting entity.”
– Kritika Chabbra (Market Analyst, MUDS Management Pvt. Ltd.)
Background of the Case
In 2018, ICICI Bank initiated insolvency proceedings with the Ahmedabad bench of the National Company Law Tribunal (NCLT) against Jaiprakash Power Ventures as the company’s total debt stood at Rs 20,143 crore at the end of March 2018.
The bank filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) which bestows on the financial creditor the right to start a corporate insolvency resolution against a defaulting corporate.
Section 7 of the IBC states, “A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, (as may be notified by the Central Government) may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.”
Jaiprakash Power in a notice to the Exchanges stated, “This is to inform you that as per the notice received by the Company, ICICI Bank has filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, for initiating Corporate Insolvency Resolution Process (CIRP) for the company with the National Company Law Tribunal (NCLT), Ahmedabad.”
Withdrawal of the Case
Recently, ICICI Bank has moved an application before the Ahmedabad bench of National Company Law Tribunal (NCLT) for the withdrawal of their application that had been given for the starting of bankruptcy proceedings against Jaiprakash Power Ventures.
Initiated by the ICICI Bank, the Jaiprakash Power Ventures lenders consortium took this step of restructuring the debt of the company by converting much of it into equity or convertible instruments.
There were no legal hurdles attached to this withdrawal as the earlier petition against Jaiprakash Power Ventures was yet to be admitted, and in such cases, IBC has provision for such withdrawal.
Source: The Economic Times
IBC 2016 & Withdrawal of Insolvency Application
Rule 8 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provided that the Adjudicating Authority may permit withdrawal of the Application on a request made by the Applicant before its admission.
Thereafter, vide The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, Section 12A was inserted to the Code, and Regulation 30A was added to the Insolvency Resolution Process for Corporate Persons Regulations, 2016.
Section 12A of the Code provides that the Adjudicating Authority may allow the withdrawal of application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of ninety percent voting share of the committee of creditors. This however has to be read with Regulation 30A which provides for an additional stipulation that an application for withdrawal under section 12A shall be submitted to the interim resolution professional or the insolvency resolution professional, as the case may be, in Form FA of the Schedule before the issue of invitation for expression of interest under Regulation 36A.
Details of Restructuring
Initially a Jaiprakash Power Ventures spokesperson confirmed that the debt restructuring had been approved by the lenders yet, he refused to divulge the details. In the same manner, the ICICI Bank representative didn’t disclose much about the deal.
A senior banker who was involved in the process revealed, “The consortium of lenders has agreed to a restructuring whereby they reduced outstanding loan of Rs 11,282 crore to Rs 5,800 crore; the balance was converted into equity or compulsorily convertible preference shares.”
The finer points of the restructuring trickled in later.
After the debt recast, the outstanding debt of the company which is part of Jaiprakash Associates group, has come down to less than Rs 6,000 crore, from what was more than Rs 11,000 crore.
One of the terms worked out was an interest write back of about Rs 2,000 crore which would come to the aid of the company in a way that it would enhance its net worth and the entity is likely to report a net profit this fiscal itself.
A senior company official, speaking on the condition of anonymity, disclosed, “After the restructuring, the company’s annual interest cost burden will decline from nearly Rs 1,500 crore to less than Rs 600 crore, leading to a gain of nearly Rs 1,000 crore annually in interest cost alone.”
According to the statement, the company’s annual interest burden which was about 1,580 crore will reduce substantially, amounting to? 570 crore only.
A senior banker, who was part of the entire process divulged in the details of restructuring and stated that as many as 22 banks and financial institutions have agreed to convert Rs 3,840 crore of the debt into compulsorily convertible preference shares, with a maturity period of 29 years and coupon rate of 0.01%, The banker added that an understanding has been reached and the leftover debt of Rs 5,800 crore on the company’s book will carry an interest rate of 9.50%.
Furthering this, under the scheme of the arrangement, the defaulting company, Jaiprakash Power Ventures has gone ahead and converted $110 million of foreign currency convertible bonds (FCCBs) into equity at Rs 12 a share, much higher than the current market price of less than Rs 2 per share. This conversion of $110 million FCCBs, based on the exchange rate when the restructuring process started, was equivalent to Rs 663 crore.
JSW Energy Agreement
The Sajjan Jindal-led company, JSW Energy has entered into an agreement with Jaiprakash Power Ventures Limited to restructure the debt of 752 crore.
As part of this agreement, of the financially-troubled Jaiprakash Power Ventures has converted? 351.77 crore of corporate loan from JSW Group into equity shares at par value of? 10 each. This was disclosed by JSW Energy in a filing to the exchanges.
The filing elaborated that it has been worked out between the two entities that of the balance outstanding debt of? 400 crore,? 280 crore will be written off, whereas, the remaining? 120 crores will be the debt that Jaiprakash Power Ventures will have to repay to JSW Energy. This repayment will be done on a quarterly and priority basis after Jaiprakash Power Ventures has paid 10 percent of the restructured debt to its secured lenders.
In the March 2018 quarter JSW Energy had already made a provision of 574.19 crore to Jaiprakash Power Ventures for restructuring its debt. Giving details of the agreement between the two companies, the filing said, “Further, Jaiprakash Power Ventures and JSW Energy have agreed to waive their respective rights to receive any payments from each other and unconditionally release each other from all liabilities in relation to the Securities Purchase Agreement dated November 16, 2014, for transfer of Karcham and Baspa hydro assets from JPVL to the company.”
This move has resulted in the reversal of liabilities of 177.48 crore payable to Jaiprakash Power Ventures in the books of JSW Energy.
Impact of Restructuring
After this restructuring, Jaiprakash Power Ventures has become a professionally run power company. The breakup of its shareholding stands as:
Original promoter JP group’s shareholding has declined to 24%.
Banks and financial institutions have supremacy now as they hold 42.643% shares of the company.
FCCB holders have got 8.36% shares.
JSW Group has a little over 5.1% of shares in Jaiprakash Power Ventures now.
Whereas about 19% shares are held by public shareholders.
In so much as the key aim of formulating and enacting this Code was to empower the creditors who can get back their dues from defaulting companies through CIRP or by liquidating the defaulting entity, the Jaiprakash Power Ventures insolvency case has come to a positive end. The financial creditors along with all other stakeholders have got a fair deal by restructuring the defaulting company.
“The withdrawal of Jaiprakash Power Ventures insolvency application is a positive outcome which should be applauded as standing up to the established purpose of IBC. Even more, it shall be beneficial for all stakeholders in the long run.”
-Shweta Gupta, Founder, and CEO, MUDS