Infrastructure developers in India have traditionally placed significant reliance on bank financing for infrastructure development. However, because of aggressive bidding, delayed payments causing strain on cash flows and lack of a secondary market for infrastructure assets, many stressed accounts in the Indian banking system are in the infrastructure sector. As various schemes introduced by the Reserve Bank of India for out-of-court resolution failed to reduce financial strain in the infrastructure sector, the focus has shifted to the Insolvency and Bankruptcy Code, 2016, which is being seen as a panacea for stressed asset resolution. By bridging information asymmetry, prescribing timelines and providing a comprehensive institutional framework for insolvency resolution, the code instils certainty in the process and encourages stakeholders to seek resolution on the basis of “real value” of an asset or a business across various sectors.
However, insolvency resolution under the code cannot be premised on a one-size-fits-all approach, especially in the infrastructure sector. For example, the problems that plague a power generating company are different from those of a company offering telecom services. Matters become further complicated in the case of regulated entities. Any insolvency resolution of such entities will have to conform to the sectoral regulations and guidelines, and different sectoral regulators and concessionaires have a decisive role to play in regulating the affairs and operations of such entity including at the time of transfer of assets and business.
While the code is premised on maximizing the value of assets and balancing of interests of all stakeholders, outlined below are some measures that could help ensure that the stated objectives are achieved.
Contract design and flexibility: The prospect of resolution applicants stepping forward to offer a resolution plan will be increased if they have the certainty of being able to renegotiate the current infrastructure contracts to make the project viable. The government needs to identify a clear set of principles to facilitate such renegotiation with the relevant concessionaire or authorities.
Change in banks’ approach and widening the pool of finance providers: The inherent contradiction between front-loading of debt repayment and the long gestation period or economic life cycle of an infrastructure project has contributed to the financial strain in the infrastructure sector. Financial institutions should have reasonable flexibility, under the regulatory framework applicable to them, to align the revised debt repayment profile to the life cycle of a project. Long-term investors such as insurance companies and pension funds should be encouraged to step in by relaxing the investment norms applicable to them to facilitate sharing of exposure at various stages of a project.
Evolving a framework for group insolvency: Forward and backward integration in the infrastructure sector is usually done to maximize profitability and increase competitiveness. However, the reliance of infrastructure finance providers on having recourse to the parent entity of a project company has led to various entities in a group facing the spectre of initiation of the insolvency resolution process. The Insolvency and Bankruptcy Board of India along with the government should work on a framework for group insolvency to prevent a domino effect and unfair prejudice to stakeholders of group entities.
Preserving business value: For a successful resolution, the risks associated with continuing the business on account of initiation of the insolvency resolution process should be minimized. The moratorium under the code should also extend to concessions or licences not being terminable during the insolvency resolution process. To preserve the value of the business, there should be no inordinate delays in implementing the resolution plan on account of want of clearances and approvals. Ideally, the code should provide for deemed approval after the expiry of a prescribed period but a start can be made by implementing the Insolvency Law Committee’s suggestion, in its report dated 26 March 2018, to have a prescribed time period for procuring approvals from various statutory bodies.
India has huge potential and a growing role to play in global markets, and adequacy of infrastructure development is an important factor for growth. This can be achieved if the above factors are adequately addressed while attempting resolution of stressed companies in the infrastructure sector to instil confidence among investors (both domestic and foreign). The government, regulators and creditors need to proactively work together and walk the talk to provide an enabling ecosystem for resolution of stressed infrastructure assets.
Divyanshu Pandey and Arpita Garg are partners in the Gurugram office of J. Sagar Associates. Views are personal.
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