NCLT consults Centre, bankruptcy board to resolve Jaypee Infra deadlock

In the matter between IDBI Bank and Jaypee Infratech, the National Company Law Tribunal’s (NCLT) New Delhi Bench has sought views from the government and Insolvency and Bankruptcy Board of India (IBBI) on ways to resolve the deadlock in the resolution process.
Majority of the resolutions brought in by the resolution professional (RP) in the committee of creditors’ (CoC) meeting have been rejected and the corporate insolvency resolution process (CIRP) is virtually at a standstill.

In case of Jaypee Infratech, home buyers, too, are part of the CoC, along with lenders.
The matter was referred to the New Delhi Bench after both the judges of the Allahabad Bench of the NCLT gave differing views on the matter of voting rights of the financial creditors in the CoC meetings.
One of the judicial members of the Allahabad Bench of the NCLT, in his observation, said: “Due to the non-participation of home buyers, the deadlock has been created in the CIRP that may eventually lead to the liquidation of the corporate debtor.”
One of the members was of the opinion that all creditors including home buyers should be considered together, while the other member wanted home buyers to be treated as a different class.
One of the members said: “In cases where the CoC comprises the real estate class of creditors up to 50 per cent of voting share or more, then the highest number of voting shares in favour of resolution has to be taken into consideration — when there is a deadlock in passing the resolutions — without looking at threshold limit prescribed under the IBC (insolvency and bankruptcy code).”
The other judicial member of the Allahabad bench of NCLT, however, said, “Lasting solution to the problem of deadlock can only be found by treating home buyers as a class and their voting pattern be taken with reference to the total voting share of the class, to reflect the will of the class.”
The homebuyers have 58.10 per cent voting share of the total debt to the debt given by the corporate debtor, whereas lenders have 41.8 per cent voting share.
Apart from withdrawal of the insolvency plea, which requires a 90 per cent approval of the CoC, most of the major resolutions brought under the CIRP require a 66 per cent voting in favour of the resolution to be passed.
However, apart from one of the resolutions brought in by the IRP in the Jaypee Infratech insolvency case, nine out of the ten resolutions have been rejected as none of the resolutions got the required votes to be passed.
This is because of the poor response in voting of the home buyers as compared to the en-masse participation by the lenders.
To address this, the IRP took a view that only the votes that are actually cast will be considered and the abstained votes will disregarded.
But the home buyers’ association opposed this, saying this will defeat the purpose of including the home buyers as financial creditors.
The New Delhi Bench, in its order, has stated that the government and the IBBI have to take a view on the matter, taking into consideration the larger public interest involved as well as the interpretation of the provisions of the IBC, given this is going to have wider ramifications not only on the ongoing case but also on other matters under the IBC.

IDBI Bank reports threefold increase of loss to Rs 4,185.48 crore for Q3

IDBI Bank Monday posted widening of loss by nearly threefold to Rs 4,185.48 crore for the third quarter ended December 2018 as bad loans surged.
The bank had reported a net loss of Rs 1,524.31 crore in the corresponding quarter of the previous fiscal.
Total income decreased to Rs 6,190.94 crore for the quarter, compared with Rs 7,125.20 crore in the corresponding quarter a year ago, IDBI Bank said in a statement.
The bank's gross non-performing assets (NPAs) shot up to 29.67 per cent of gross advances during the quarter, against 24.72 per cent in the year-ago period.
However, net NPAs declined to 14.01 per cent of the total advances, from 16.02 per cent in the December 2017 quarter.

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As a result, the bank's provision for bad loan increased to Rs 5,074.80 crore, compared with Rs 3,649.82 crore a year ago.
However, slippages were Rs 2,211 crore which were lowest in the past seven quarters, Recovery from NPAs improved to Rs 3,440 crore during the quarter, compared with Rs 537 crore in the same period a year ago.
The ownership of the bank has changed from the Government of India to LIC.
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The statement further said Life Insurance Corporation of India (LIC) completed acquisition of 51 per cent controlling stake in IDBI Bank on January 21 and the bank received total capital of Rs 21,624 crore from the insurer.
On the backdrop of capital infusion from LIC, it said that the bank has achieved regulatory capital requirement as on December 31, 2018, and its common equity tier-1 (CET-1) capital improved to 9.32 per cent as on December 31, 2018, against 6.62 per cent a year ago.

Two steps back: Why govt's withdrawal of FRDI bill is a missed opportunity

India needs a strategy to get the government out of banking. Non-performing loans among state-owned banks -- a legacy of India’s socialist past which account for nearly 70 per cent of deposits -- have crossed 5 per cent of GDP. The central bank has restricted lending at 11 of them and forced one, IDBI Bank Ltd., to sell itself to the government-owned Life Insurance Corporation of India.
State banks have repeatedly been a burden on the exchequer and will almost certainly continue to be so. The great need is to increase the number and size of private banks, which have performed better than their public-sector counterparts. Unfortunately, the government just abandoned the one policy that would have eased such a transition.

Earlier this month, according to reports, the administration of Prime Minister Narendra Modi decided to withdraw the Financial Resolution and Deposit Insurance bill from parliament. The bill was meant to address the biggest hurdle in dealing with failing banks: There’s no way to sell them off.
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The current legal framework only allows struggling banks to be merged or liquidated. While the banking regulator, the Reserve Bank of India, has in the past forced healthier banks to swallow up weaker ones, there are very few state banks strong enough now to take on such a burden. The only other option is to sell off each loan or asset one by one, which can take as long as 10 years.
With no other options, the government has been recapitalizing loss-making banks -- essentially pouring taxpayer money down the drain (including into Punjab National Bank, which lost nearly $2 billion in a corruption scandal). Selling off IDBI only puts the bank’s problems onto the balance sheet of LIC, one of India’s biggest insurance companies.
The FRDI bill would have done two critical things. Most directly, it would have created a mechanism to sell a bank as a living entity to another bank. A Resolution Corporation, similar to the Federal Deposit Insurance Corporation in the US, would have been created to take over failing banks and either run them temporarily, sell them, infuse equity or, as a last resort, liquidate them.
Second, once such a framework was in place, the RBI would have had much greater flexibility to give out licenses for more private banks. The central bank has hesitated thus far to increase their number, despite repeatedly promising to do so, because there was no easy way to deal with the new banks if they ran into trouble. The FRDI bill would have made the prospect of creating new banks much less risky.
Politics doomed the bill. One clause gave the proposed Resolution Corporation the option of “bailing in” troubled banks -- using uninsured depositor money to infuse equity into the bank if a buyer couldn’t be found. The optics, at a time when many state banks look like they’re on the verge of failure, were terrible. Worse, most Indians didn’t realize that their deposits were only insured up to Rs 100,000 (less than $1,500). Pensioners worried they might be stripped of their life savings.
These problems could easily have been fixed. The “bail in” clause could have been scrapped, and insurance limits raised. If the insurance were raised to $20,000, virtually all depositors would be covered.
Abandoning the bill entirely, by contrast, will have far-reaching effects. Unless India can find a way to shrink the state banking sector, it’ll be hard if not impossible to revive lending and investment. Small enterprises in particular are desperate for bank finance.
The Modi government may be right that “big bang” reforms -- liberalizing land and labor markets, for instance -- are too politically difficult. But it’s done a good job thus far implementing smaller changes that can have a big impact, such as the Bankruptcy Code passed last year that does for companies what the FRDI bill would have done for banks. If India can’t even manage these less-striking reforms, the chances of boosting growth into the double-digit range are remote.
And there’s a scarier prospect as well. The share of deposits in private banks have increased in the last two years from a quarter to a third of the total. Under current conditions, it’s not clear what the government and RBI would do if a big private bank failed. There are no public-sector banks healthy enough to buy out a big bank. There’s no fiscal space to infuse equity, as public banks are already bleeding the government's coffers.
A high-profile liquidation could possibly trigger a contagion. Many countries set up resolution regimes after the global financial crisis, understanding the grave impact of a banking failure on the real economy. India may soon come to regret not doing so as well.