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IBC may have to be tweaked: SBI, government plan priority status for real estate AIF

India’s largest lender SBI and its arm SBI Capital Markets, which is playing a key role in setting up the fund, have started reaching out to other banks and financial institutions to participate in the AIF — a regulatory parlance for privately poo...

, ET Bureau|
Nov 18, 2019, 06.41 AM IST
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This may call for introducing changes in the IBC to incorporate the concept of seniority of lenders which the code in its present form does not adequately recognise.
MUMBAI: State Bank of India (SBI) and the ministry of finance are exploring a legal framework where the proposed alternative investment fund (AIF) for reviving stalled real estate projects will have the first charge on assets and cash flow of entities receiving funding.

This may call for introducing changes in the Insolvency and Bankruptcy Code (IBC) to incorporate the concept of seniority of lenders which the code in its present form does not adequately recognise, two senior industry sources familiar with the development told ET. The finance ministry has referred the matter to the law ministry, said one of them.

India’s largest lender SBI and its arm SBI Capital Markets, which is playing a key role in setting up the fund, have started reaching out to other banks and financial institutions to participate in the AIF — a regulatory parlance for privately pooled vehicles such as venture capital, private equity, and real estate funds.

According to regulation, a bank can invest up to 10% of the corpus of an AIF.

Clarity Needed Post Essar Verdict
Thus, SBI can invest a maximum Rs 2,500 crore in the fund — requiring other institutions to join the proposed Rs 25,000-crore fund in which the government will contribute Rs 10,000 crore. Giving the AIF a senior status among lenders could make it easier for other banks to invest in it.

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“The Essar ruling makes it clear that the commercial wisdom of committee of creditors (CoC) will prevail and the same cannot be substituted by National Company Law Tribunal (NCLT) or National Company Law Appellate Tribunal (NCLAT). In this background if the AIF is given certain privileges over and above the ones given to other lenders then the commercial decisions by AIF will prevail and lenders and authority will have to abide by it,” said Ashish Pyasi, associate partner, Dhir and Dhir Associates.

Under the plan, the fund while lending to a company will lay down that its seniority of charge should be part of the intercreditor agreement. If the company fails to revive and later lands up at the insolvency court, the CoC will have to recognise the senior-most charge it has among all lenders. If the company is already under the IBC, the CoC will have to approach the AIF and accept the seniority of charge. At present, IBC provides for raising of interim finance by the resolution professional after taking approval from the committee of creditors.

According to Sapan Gupta, national practice head of banking & finance, Shardul Amarchand, granting seniority can be achieved through a clarification post the Essar judgment.

“If the resolution process under IBC has been initiated and CoC approves additional financing, it will be treated as priority financing and IBC currently provides for it. If the corporate debtor has not been admitted under IBC, the priority funding status can only be granted by existing lenders by contract and following banking and transfer of property act principles. If the borrower enters IBC, Essar judgment now recognises distribution as per security interest. Therefore, CoC can recognise the priority of new lender,” said Gupta.

In the Essar ruling, the Supreme Court last week upheld the primacy of financial creditors in the distribution of funds received under the corporate insolvency scheme.

Pyasi of Dhir and Dhir Associates feels that the creation of first charge alone before initiation of IBC proceedings may not resolve the issues which AIF may face. “It is important that by amending provisions of IBC certain additional voting powers are given to AIF in committee of creditors else it will be another financial creditor in the committee,” he said.

According to senior bankers, SBI Capital Markets may have to find a way to resolve a conflict of interest while choosing between projects where the SBI has outstanding loan and in companies where the parent bank is not a lender.

SBI Capital Markets, the investment banking arm of SBI which has been selected to act as the investment manager of the fund for affordable and mid-income housing projects, is actively hiring investment professionals for the AIF.

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