Banks have become accustomed to swallowing the bitter pill in bad debt cases and the level of recoveries does not reflect the path taken, be it the Securitization and Asset Reconstruction Act 2002 financial instruments and the application of interest on securities (SAFAESI) or corporate insolvency. resolution procedure (CIRP) under the Insolvency and Bankruptcy Code (IBC). This is largely the result of poor underwriting. Thiru Arooran Sugars Ltd (TASL) is the latest in a pathetic debt collection by banks.
The company which had a crushing capacity of 8,500 tons of cane per day (TCD) between its two factories in Tamil Nadu and Andhra Pradesh, as well as a 60 kiloliter per day (KLPD) distillery and a captive production of ‘about 40MW, was returned to CIRP under IBC by banks in 2019. Approximate liabilities admitted in CIRP were about Rs 1,580 crore, mainly bank loans of Rs 1,454.58 crore and due to operational and other creditors, including employees, farmers and unpaid Provident Fund (PF) contributions.
The shocking revelation is that even according to records, around Rs 1,000 crore of bank loans have been classified as unsecured. IDBI Bank, Canara Bank and Punjab National Bank (PNB) each had well over Rs 100 crore in this category. The presence of Canara Bank in this list is most surprising because IDBI and PNB have the formidable reputation of being ripped off again and again!
The company suffered losses from the year 2013-14 itself and it is unclear how the account was handled from then on and why the CIRP was only launched in 2019 when the law came into force in 2016. Most likely, the company continued to tell takeover stories like most discredited companies, which caused the string of bad bank loans over the past decade.
Initially, the National Company Law Tribunal (NCLT) ordered the liquidation of the company. In the process, KAL Distilleries Pvt Ltd, a relatively new face in the hinterland of Tamil Nadu, emerged to take over the business from TASL under a jointly formulated merger program under the IBC and the Companies Act 2013.
KAL has successfully completed the takeover of a fully integrated sugar mill with a distillery and a huge land bank and associated assets worth Rs 145 crore in settlement to creditors and Rs 110 crore infused as fresh cash into the company.
The amount and manner of settlement of bank exposures matches some of the worst settlements that have drawn public ire from the IBC process, such as in the cases of Videocon and Jet Airways.
Even at the aggregate level, the recovery is less than 10%, but the bank recovery has reached new heights and mocks the arithmetic of insolvency recoveries.
Unsecured bank loans of around Rs1,000 crore are settled with a princely sum of Rs4.99 crore! This amount is paid in four quarterly installments!
For example, at Canara Bank, which is generally considered a better run Public Sector Bank (PSB), the amount that will be received in four installments stands at an incredible sum of Rs58 lakh against an outstanding amount of around Rs115 crore. The recovery is about 50 paise at Rs100!
The bank may spend more on management fees than the amount recovered. The same goes for the rest of the pack.
Secured lenders get Rs80 crore over five years against Rs458 crore outstanding!
IBC lawyers and consultants get a much higher amount (Rs8 crore plus unquantified liquidation cost) than all unsecured bank lenders! This could set a dubious new benchmark in this field.
Banks are freeing up again, with little liability for cavalier loans. The board, chairman and the rest of management fail to find a suitable buyer and rely on rough IBC professionals, who have little ability to locate strategic buyers for such assets. It is very surprising that no major player in the sugar industry has considered this proposal.
The merger scheme will provide significant tax benefits to the acquirer, as all losses will arithmetically amount to the net loss to all creditors of approximately Rs1,580 crore less than the settlement of Rs145 crore, or Rs1,435 crore. Taking a tax rate of 27%, the benefit will be around Rs385 crore or 150% of the total cost borne by the acquirer of Rs255 crore or Rs145 crore to settle creditors and Rs110 crore infused into the business .
There couldn’t have been a better deal for a buyer, even if the sugar mill is balled up and sold as scrap as world steel prices soar to new heights!
And the banks gulp down the ashes in full gulp and swallow it with a glass of ethyl alcohol that the distillery will be releasing very soon!