Thursday, July 13, 2017

Essar Steel not singled out for insolvency procedure: RBI tells Gujarat High Court

In its submissions before the Gujarat High Court on Essar Steel’s petition challenging the insolvency proceedings, the Reserve Bank of India on Wednesday said the steel major was not being singled out and the procedure to identify the top 12 NPA accounts was followed with a scientific and a structured method.
After hearing the arguments through the day, the Court adjourned the case for further submissions on Thursday.
Appearing for the RBI, senior counsel Darius Khambhatta argued that the petitioner — Essar Steel — had made false claims about its ignorance of insolvency proceedings initiated against it under the National Company Law Tribunal (NCLT) and the company was in discussion for restructuring, whereas ‘the records show that it was far from completing the restructuring’. Khambhatta also rejected ESL’s claims of the company being singled out arbitrarily by the lenders for the insolvency procedure.
“The objective (to initiate Insolvency and Bankruptcy Code procedure) was aimed to recover maximum volume of outstanding in minimum amount of time. The procedure adopted to initiate IBC against the top 12 accounts was based on scientific and structured method. IBC is not for winding up a company but to help it avoid winding up with appointment of resolution professionals,” said Khambhatta.
Large credit accounts
For the purpose, RBI followed a method based on a mechanism for monitoring of large credit accounts. From the information available through the monthly filing of returns with the Central Repository of Large Credits (CRLC), RBI selected 500 large accounts, out of which ‘super large accounts’ having ₹5,000 crore or more outstanding were identified. From the accounts only those companies, which had over 60 per cent of their outstanding as NPA since past 15 months were identified for the IBC procedure.
“The 12 accounts represent 25 per cent of the total NPA of ₹7,50,000 crore, which forms 5 per cent of the country's GDP,” said Khambhatta justifying the identification of the accounts for IBC and invoking of the law by lenders in the larger public interest.
Khambhatta further said that 15 per cent of the total advances made by the public sector banks have turned NPA. “Therefore, the focus of the government and Parliament is to recover this amount otherwise it will be a loss to the country,” he said.
Essar Steel has bank exposure of ₹45,655 crore, out of which ₹31,671 crore turned NPA as on March 31, 2016, which subsequently increased to ₹32,864 crore by March 31, 2017.
ESL had filed a petition before the High Court on July 4 seeking to set aside RBI’s directive to banks, through a press release on June 13, to initiate insolvency procedure under the NCLT against 12 top NPA accounts. The company had claimed that it was already discussing a restructuring proposal with its lenders and that the RBI's decision came as a surprise amid such efforts.
Taking a strong objection to the claims made by Essar Steel, the RBI counsel made a pitch before the court seeking to set aside the petition on the grounds that the company made false claims of the NCLT circular coming as a surprise to it and “misled the court by making false statements. Also, Essar Steel falsely claimed that it had reached settlement with lenders when it was far from completing the restructuring process,” Khambhatta said.
Far-reaching implications
Justice SG Shah underlined the far-reaching implications of the outcome of the case and its impact on other similar cases, where banks would initiate insolvency action against defaulting companies. The case, hence, was placed for further hearing on Thursday, when RBI counsel will continue his submissions, followed by submissions by State Bank of India, which is leading the consortium of 22 banks as well as global lender Standard Chartered Bank.
Meanwhile, the order passed by the court on Friday last extending the stay on insolvency proceedings against Essar Steel remains in force till the next hearing on July 13.
(This article was published on July 12, 2017

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