ABG Shipyard's debt conversion in bankruptcy case adhered to rules: Banks

The CBI, which examined top executives of ICICI Bank last week, is expected to call officials of some public sector banks in the coming week

Indian bank officials have informed the Central Bureau of Investigation (CBI) that they had converted a part of their loans into equity in the bankruptcy case of ABG Shipyard.

This, according to them, was done in accordance with the August 2008 corporate debt restructuring scheme circular of the Reserve Bank of India (RBI).

The CBI, which examined top executives of ICICI Bank last week, is expected to call officials of some public sector banks (PSBs) in the coming week.

This will help understand how the banks increased their exposure to the company even when ABG was defaulting on loans. ICICI Bank did not reply to an email seeking comments.

According to bank officials, the account was referred to the corporate debt restructuring cell in 2014. Banks formed a joint lenders’ forum to finalise a corrective action plan for ABG Shipyard to resolve the account.

But bankers said ABG did not perform satisfactorily and its financials further deteriorated, breaching the milestone set in the CDR scheme.

The lenders’ forum invoked the provisions of strategic debt restructuring in accordance with the RBI circular dated June 8, 2015. They then converted part of their outstanding dues into 51 per cent stake in the company.   

In the same year, the lenders also disbursed another tranche of Rs 551 crore up to March 31, 2016. This was towards priority debts for meeting the immediate operational and capital expenditure requirements of the company.

In the same year, the company reported revenues of Rs 37.76 crore from operations and net loss of Rs 3,704 crore.

In July 2017, the company was sent for debt resolution under the Insolvency and Bankruptcy Code (IBC), 2016, but failed to find any takers.

The account was declared a fraud in 2019 after a forensic audit by Ernst and Young revealed that company officials diverted funds between 2012 and 2017.

Industry sources said as the shipbuilding industry went through a slump, ABG Shipyard could have used the bank funds to build a leaner, more cost-efficient capacity while not depending merely on government orders.

The board, chaired by Rishi Agarwal, also consisted of bank nominees and independent directors.

“Shipyards in general, be it ABG, Reliance Naval & Engineering or Bharati Defence & Infrastructure landed in trouble due to a longish cyclical slump brought by the global economic crisis. However, instead of the alleged siphoning off funds, ABG Shipyard could have used the borrowings to go after international orders. Its capacity was good but borrowings would have been lesser and it could have avoided enhanced interest burden if it hadn’t diverted the money. With this, its competitiveness also went down eventually,” said a person close to the development.

ABG also relied on businesses from the steel and shipping companies of the Essar group. As Essar’s steel business was also referred to the NCLT for debt resolution, ABG’s orders dried up.

“Once you have put your head in any project as a lender, it is difficult to leave it half way but just hope that it won’t turn bad. In case of ABG Shipyard, its lenders never saw fruition of their hope of an upswing in ship building. Instead, they were caught off-guard with the borrowings being diverted,” said a banker.