11year ago, lenders to engineering and con-struction major Gammon India Ltd invokedthe Strategic Debt Restructuring (SDR) mech-anism. A total of 16 banks, led by ICICI Bank.

decided to convert a part of their loan into 63.07 percent equity. The SDR Scheme, an improved version ofthe erstwhile Corporate Debt Restructuring, or CDR,mechanism, gives lenders sweeping powers to throw outmanagements of companies whose assets have turnedbad. The bankers, however, could not find a buyer for

the entire Gammon India and instead decided to restruc-ture it into three parts - power transmission & distri-bution (T&D), engineering, procurement & construction(EPC), and the residual business. The Thailand-based GPGroup has shown interest in the EPC assets whileAjanma Holdings is keen to buy a stake in the T&D busi-ness. The banks are fine with these offers.After all, their80 per cent exposure is getting transferred to these twocompanies. Gammon India, too, is relieved, as most of itsdebt is going away with the EPC business.

74 BUSINESS TODAY January 292017

Gammon India is among close to two dozen compa-nies where bankers have invoked the SDR Scheme,launched 18 months ago to make the process ofdebt re-covery faster and smoother. The list includes AlokIndustries, Usher Agro, Diamond Power, Monnet Ispat,Jaiprakash Power and IVRCL. However, the scheme,likeits earlier avatars, has found little success due to its rigidframework, and Gammon India is probably the onlycase where banks are hopeful of a turn in fortunes. Atstake is 'n,OO,OOO crore debt where banks have invoked

SDR. So, what went wrong? Several things, say experts.One, the bankers triggered SDR in a hurry, without

proper documentation or forensic audit. "They did notprepare themselves," says a private banker. This is evi-dent in case ofJyoti Structures, a mid-sizedcompanywhere banks, led by State Bank ofIndia, or SBI, invokedSDR but decided to approach buyers without convertingtheir debt into equity. They thought the buyer would justlap up the company. They were wrong. The deal didn'tgo ahead due to pricing and other issues. The I8-month

January 29 2017 BUSINESS TODAY 75

INDIA'S BEST BANKS / NPAs..............................................................

LARUNDHATI BHATTACHARYA, CHAIRMAN, SBI

"We have seen people back out at thelast minute. Some buyers believe there

could be hidden liabilities."

SDR period will lapse in February. In the last one year,Jyoti Structures' losses have risen to 40 times its equity.

Experts say the problem starts at the loan documen-tation stage itself,which iswhy in many cases wherethere is no provision for conversion ofloan into equity,the bankers are in the process of creating fresh documen-tation. "We cannot enforce (the change) ifthe companydoesn't agree with the new terms," says K.Wadhwa ,General Manager (StressedAssets), Dena Bank.

Also, banks get 210 days to convert debt into equity.Here, too, the companies obstruct the process ofincreas-ing authorised capital, getting board approval, etc. In theABG Shipyard case, for instance, shareholders rejectedthe conversion ofdebt into equity. ABG has now giventhe task offinding a strategic investor to investmentbanker Rothschild. The promoters' resistance to takingnew investors on board is also a hurdle. In some cases,unsecured creditors try to thwart the process. In theUsher Agro case, two parties bombarded the companywith winding-up petitions for recovery ofdues. "Thesewinding-up petitions run concurrently with the SDR pro-cess.There may be examples where bankers have to re-solve these cases before the sale," says a lawyer.

Another issue is confusion due to the lack of a uni-fiedlaw/framework to deal with the problem. AlokTextile, for instance, is precariously placed for recom-

ROADBLOCKS• Some existing loan agreementsdo not allow conversion of debtinto equity

• Delay in shareholders'approval for increasing thecapital base

• Consortium of bankers takestime to clear the SDR package

• Promoters create roadblocksby approaching BIFR

• Unsecured creditors demandtheir pound of flesh and filepetitions

mendation to the Board for Industrial & FinancialReconstruction, or BIFR, as a sick company. If it is admit-ted into BIFR, the SDR process could be stopped, though abanker in know of the developments says the company'sentire net worth has not been eroded, a prerequisite forbeing admitted as a BIFR case. "They have not soughtBIFR protection so far," he says.

THECDRWAY?Expert says the SDR Scheme could go the way of theCDR Scheme and fail to resolve the problem of stressedassets. Under CDR, banks used to accept a moratoriumon interest payments and longer period for payment ofthe principal. Investment banking firm RBSA Advisorssaid in a recent report that the CDR of44 firms with adebt 0[,\27,015 crore failed in 2014/15. "Only fivefirms with a total debt ofU,399 crore managed toexit the CDR successfully," says the report.

Another issue is bankers' limitations as managers ofdiverse companies. "Do banks have time, energy and ex-perience to turn around a stressed company?" asks aconsultant. "Banks have converted debt into equitywithout any realistic assessment ofhow sustainable isthe debt," says Abizer Diwanji, Head, Financial Services,BY India. The sustainability ofdebt. in fact. is a majorroadblock, as many stressed asset funds want the lever-

76 BUSINESS TODAY January 29 2017

SDR COULD FOLLOW CDROver 30 per cent approved corporatedebt restructuringshave failed

YEAR FAILURE* FAILURE RATE (%)...................................................................

Mar-14 30,000 25.5...................................................................

Jun-14 38,700 26.7...................................................................

Sep-14 47,000 28.5...................................................................

Dec-14 50,100 29.8...................................................................

Mar-IS 57,000 31.1...................................................................

Jun-15 67,700 33.6...................................................................

Sep-15 76,300 35.7

*Refers to total debt «crore); Source: CDR, RCML Research

age issue to be sorted out before they go ahead with thedeal. SBIChairperson Arundhati Bhattacharya says notmany buyers are showing interest. "We have seen peo-ple back out at the last minute. Some buyers believethere could be hidden liabilities," she says.

In companies under SDR,bankers are actually re-taining promoters and appointing concurrent auditors."The change ofmanagement is not very easy in theIndian context," says Saurabh Tripathi, Senior Partnerand Director at Boston Consulting India.

Some bankers complain that the RBI'sone-size-fits-all approach doesn't work in the real world. "The RBIhas given strong frameworks that few companies fit in.As a result, we are not able to do much," saysBhattacharya. Bankers are also reluctant to stray awayfrom the regulations due to fear over inquiries by theVigilance Department. "The real problem with SDRisthat you have to cut a deal and a deal is fundamentally ajudgment call. And a judgment call cannot be rule-based, and if it not rule-based, the public sector bankscannot feel safe," says Tripathi ofBoston Consulting.

A former colleague ofBhattacharya who handledstressed assets at SBIsays every company's problem isdifferent. "If it was easy, the problem would have beensolved earlier," says M.G.Vaidyan, a former DeputyManaging Director at SBI.

ABIZER DIWANJI, HEAD, FINANCIALSERVICES, EY INDIA

"The banks have converted the debtinto equity without any realistic assess- Iment of how sustainable is the debt." ~

In many cases, the companies are facing temporaryproblems due to issues such as weak demand, cheap im-ports and overcapacity. In such a case, changing themanagement won't yield results. In many power com-panies, for example, the plant is ready but electricityboards are not signing power purchase agreements aselectricity is available at lower prices on exchanges."Nobody is thinking about innovative fmancial struc-tures in terms of how to deal with business cycles," saysDiwanji ofEYIndia.

So, what's the solution? "The only way out is to takeout all the bad debt from banks and park it in a separatevehicle in which all bank are stakeholders," says BostonConsulting's Tripathi. Arun Tiwari , Chairman andManaging Director, Union Bank ofIndia, is optimistic."The environment is challenging but I'm sure thingswill improve once the economy picks up," he says.

However, for the time being, banks are staring atlosses. They get 18 months to exit the SDRScheme. Forthe earliest cases, the period will start ending in the nextsixmonths and banks will have to make mark-to-mar-ket provisions for any diminution in the value of equityacquired under the SDRScheme.

Maybe things will worsen before they improve .•

@anandadhikari

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