DHFL stares at insolvency proceedings
The government notified the Insolvency and Bankruptcy Rules, 2019, to provide a generic framework for insolvency and liquidation proceedings of systemically important financial service providers, other than banks.
The government notified the Insolvency and Bankruptcy Rules, 2019, to provide a generic framework for insolvency and liquidation proceedings of systemically important financial service providers, other than banks. “If the creditors are unable to sign on the resolution before January 7, the government or the regulator can initiate insolvency proceedings under Section 227,” said a senior banker. In October last year, the government had superseded the IL&FS board to take over the company, which had defaulted on payments.
In the case of DHFL, bankers want mutual funds on board to ensure that no entity takes a unilateral decision. Of the about Rs 1 lakh crore exposure to the banking sector, 38% is in the form of bank loans while the rest through debt markets, mutual funds, insurance companies and deposits. Most banks have started making provision on their exposure to DHFL. While banks and nonbanking finance companies (NBFCs) have signed the proposed resolution, some mutual funds have had reservations. Reliance AMC, Edelweiss, Uttar Pradesh State Power Corporation and the insurance society owned by Indian Air Force employees had moved the Bombay High Court to recover their dues, but the court has restrained DHFL from making payments to any creditors.
The inter-creditor agreement, proposed by the DHFL management, involves lenders taking equity stake in the company. The resolution plan allows lenders to convert debt to equity and since debt holders like mutual funds are also creditors, it is important that they are on board, otherwise the whole process could be stalled. RBI has allowed banks, asset reconstruction companies to be part of ICA. Mutual funds, which are also prominent lenders to many firms, are regulated by Sebi and the market regulator’s views on certain aspects of the resolution proposed by banks are different from that of RBI. This is leading to delay in resolution and are unable to work out a common ground to rescue a defaulting firm.
The terms of the ICA, if signed by the lenders, is not binding on funds and other lenders such as insurers. The proposed resolution in case of DHFL says that all lenders acknowledge and agree that from time to time certain banks, NBFCs, other financial institutions and asset reconstruction companies may sign an agreement and shall be bound by the terms of this agreement as a 'lender' and shall acquire and assume the same rights and obligations. According to DHFL’s repayment plan, cash proceeds from loan assets will be used to repay creditors. The first category of debt worth over Rs 34,800 crore will be repaid through inflows from the company’s retail loans, where the projected cash inflow stands at over Rs 52,600 crore by financial year 2034-35. Bondholders have Rs 41,000 crore exposure to DHFL and banks have Rs 27,527 crore.