Lenders to Anil Dhirubhai Ambani Group’s (ADAG) flagship company Reliance Communications Ltd. will treat insolvency as a last option, three people close to the development have confirmed.
Instead, lenders in the RCom case would prefer that the company complete the sale of a majority stake in its tower business to Canadian investor Brookfield Asset Management and sale of some part of the spectrum it controls presently, the people quoted above said.
Avoiding an insolvency process is an effort to minimise current provisioning requirements said one senior banker involved in the case, who is one of the three people quoted above.
In an emailed reply, RCom lender State Bank of India, said it would not respond to queries on individual accounts. RCom did not respond to a query sent on email.
As per norms issued by the Reserve Bank of India, banks have to provide for 50 percent of the secured exposure and 100 percent of unsecured exposure, if a case is admitted under the Insolvency and Bankruptcy Code, 2016.
Several banks are already dealing with provisions against 12 large insolvency accounts, which formed the RBI’s first list of stressed accounts released in June. They are likely to face further pressure due to a second list released by the regulator last month, due to which more accounts are expected to see insolvency action, and hence further provisioning, in December. Adding RCom to this list could prove detrimental to the finances of public sector banks which have the maximum exposure against the telecom company.
About 17 domestic banks and a clutch of international banks have a combined exposure of over Rs 45,000 crore to RCom as per a report published by rating agency Care Ratings Ltd. in May 2017.
Their hopes of any loan recovery were dashed on Sunday when the ADAG company said that it had mutually ended merger talks with Aircel Ltd, after a year, due to “legal uncertainties” and “intervention by vested interests”. This is a setback for RCom’s lenders who invoked the strategic debt restructuring (SDR) scheme in June 2017, hoping that the Aircel merger deal would help in deleveraging.
The news will also impact the Brookefield deal. In an interview with Mint newspaper, Punit Garg, executive director at RCom, said that the deal with Brookfield is currently being reworked to reflect the loss of Aircel’s tenancies, which were earlier part of the deal. This could mean that the Rs 11,000 crore valuation which the Canadian investor had initially agreed to, may be revised downward. The Brookfield deal was first announced in December 2016.
Insolvency May Be Unavoidable?
The banks may want to prevent insolvency proceedings but RCom is already facing one such petition filed by Ericsson India, an unsecured creditor, looking to recover about Rs 491.41 crore. The next hearing in the matter is slated for Friday, October 6, 2017. If admitted by the National Company Law Tribunal, this would lead to all lenders being pulled into the resolution process.
Under the IBC, the admission of an insolvency case is followed by the appointment of an interim resolution professional and the creation of a committee of creditors in which a creditor has votes proportionate to the percentage of debt. The resolution professional is tasked with the job of identifying creditors and arriving at a resolution plan, which must then be approved by the committee and finally the NCLT.
What If SDR Prevails?
With the merger talks with Aircel having failed, RCom’s debt resolution plan is currently on thin ice. Domestic lenders had approved the SDR scheme, under the condition that the Aircel merger and the Brookfield sales be completed.
The SDR gave bankers time till December 2017, following which they would have to convert debt to equity representing at least a 51 percent stake in RCom, thereby taking operational control. In turn, RCom got a standstill on interest servicing, principal repayment and asset classification till December 2018, meaning that till such time, the domestic lenders would not tag the account as a non-performing asset.
According to two of the three people quoted above, the idea behind invoking SDR was that the once the sales had been completed, the remaining businesses of RCom could become sustainable and could be restructured easily. If the sales are not inked in time, the lenders would be responsible for finding buyers and completing them.
Since Sunday the company has elevated four executives and expanded its board. On Monday RCom elevated its President of Telecom Business Punit Garg as executive director and Chief Financial Officer Manikantan V as director.
It also elevated Suresh Rangachar and Gurdeep Singh as directors on the boards of its subsidiary companies.
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