The possibility of any great success of strategic debt restructuring (SDR) looks bleak as far as the Indian steel industry is concerned and a section feels the proposed new bankruptcy law could help revive the sector.
“There had been some instances wherein lenders have converted debt to equity, but such conversion has been of practically no impact as the steel industry as a whole, not only in India, but globally, is reeling under depressed demand and excess supply,” an official from a Kolkata-based steel company said.
Incidentally, almost all Kolkata headquartered steel-makers had initially gone for corporate debt restructuring (CDR) under which they had got some concessions on repayment of the principal and interest component of their debts.
But, after the negligible impact of CDR over the past few years, the banks had resorted to SDRs, wherein loans taken by the companies were being converted to equities.
According to some estimate, at present, the steel industry as a whole accounts for as much as Rs 4 lakh crore of loans from the banks in the country.
“I do not think there will be many SDRs going forward because so far it has not addressed the basic problem being faced by the industry. The problems were not addressed because the steel market itself is in a difficult stage,” the official said.
Moreover, there had been practically no instance of banks actually taking over management control of defaulter companies despite converting debt to equity.
Incidentally, the Reserve Bank of India had issued a circular on the Strategic Debt Restructuring Scheme (SDR) on June 8, 2015 that re-iterated to all the commercial banks and term-lending and refinancing institutions like Exim Bank, Nabard, NHB and SIDBI that they should consider change of management to recover stressed assets.
The circular said that the general principle of restructuring should be that the shareholders bear the first loss rather than the debt holders.
In the circular, the apex bank had come out with three suggestions for the banks to consider when a loan is restructured.
The first suggestion was possibility of transferring equity of the company by promoters to the lenders to compensate for their sacrifices, while the second suggestion was promoters infusing more equity into their companies.
The third suggestion was transfer of the promoters’ holdings to a security trustee or an escrow arrangement till turnaround of company to enable a change in management control, should lenders favour it.
Commenting on the situation, an industry source said, “It has been found that existing management of companies who are unable to repay the debt or whose accounts have become kind of NPA have practically no grudge in giving up management control in the current market situation, especially at a time when prices are low and demand for end-products is not that high.”
Steel prices had fallen nearly 35% during the past one-and-half-years and, as a result, most of the steel companies had failed to service their debt.
“Now a new bankruptcy law may come in and only that will solve the problems. But even the new bankruptcy law will take its own time,” the official said.
Incidentally, in February 2015, The Bankruptcy Law Reform Committee had submitted its interim report, but there has been no major progress after that.
“Till a tribunal is set up, implementation of the committee’s suggestion and framing of the law would be difficult and it will take at least one year from here to come out with a bankruptcy law,” the official said.
Another source said half of the cycle has already moved as far as SDR is concerned and now what will happen is instead of companies bearing losses, these would now be borne by banks.
“The situation will be such wherein all losses would be borne by the government and profit would be shared by all as the banks will be required to be funded by the government,” another source said.