As an amendment to the Insolvency and Bankruptcy Code (IBC) opens up the possibility of a court-monitored resolution for Dewan Housing Finance Corporation (DHFL), the banking regulator and lenders may seek to ring-fence DHFL’s assets and operations from any adverse action till January 7, when the six-month period for resolving the asset by other means expires.
Experts FE spoke to said that such a step could be a precursor to regulatory action under Section 227 of the IBC and would help ensure that the asset is protected against risks such as attachment by enforcement agencies and collection agents leaving the company. Apurva Jayant, partner, L&L Partners, said, “Pending commencement of the process, one cannot rule out RBI/ lenders going to court wanting status quo for the asset till next steps are finalised.”
Legal experts expect the process of insolvency action in the case of DHFL to be initiated by the RBI, which will appoint an advisory committee to carry out the process. Comprising representatives of RBI, lenders and other stakeholders, the advisory committee will oversee the process, which would be managed on a day-to-day basis by the committee of creditors (CoC) along with the administrator.
“Given the composition of the creditor group — mutual funds and insurance companies — Sebi (Securities and Exchange Board of India) and IRDA (Insurance Regulatory and Development Authority) may also play a consultative role,” Jayant explained. Bomi Daruwala, partner, Vaish Associates, said that the bankruptcy mechanism for financial service providers has three major points of departure from the existing insolvency framework for non-financial firms. “The first is the appointment of an administrator and three-member committee to assist. The second is that the interim moratorium is granted just after the application to NCLT and the third is that a regulator can refer cases to NCLT,” he said.
In the months following DHFL’s first default in June, its lending banks signed the inter-creditor agreement (ICA) as per the terms of the RBI’s June 7 circular. A resolution plan was also drawn up. However, the plan was never fructified as a few MFs, fixed-deposit (FD) holders with DHFL and the trustee organisation for retail bondholders filed separate petitions in the Bombay HHC and debt recovery tribunals.
A draft forensic audit report that raised a stink around fund diversion by DHFL and a probe by the Serious Fraud Investigation Office effectively did away with the possibility of the resolution plan being implemented. A framework for resolving bankruptcy at financial firms was also necessitated due to the inability or hesitation by banks, particularly public sector banks, to arrive at a valuation for such companies. It is for this reason that the resolution professional was brought in to complete valuations so that resolutions would happen faster. Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, said, “With banks having substantial exposure to non-banking finance companies, the risk came back to banks as asset-liability mismatches happened in the case of housing finance companies.”
The recent change in rules will ensure that assets of finance firms too will be valued by RPs and thus resolution could move faster. In financial services companies the subject of evaluation will primarily be its cash flows and value of assets. At the same time, the new framework alone may not be enough to resolve an asset like DHFL. “The issue that exists as of now is that the market for stressed assets is not there other than a few sector-specific companies,” Parekh said.
Source: Financial Express, November 2019