Insolvency heat: Lanco encashes suppliers' bank guarantees

Firm received Rs 470 cr from sub-suppliers in respect of various EPC projects

The insolvency move of bankers has created a ripple effect in the industry with Lanco Infratech, one of the companies in the Reserve Bank of India’s action list of 12, encashing bank guarantees of its suppliers. A similar predicament is faced by steel companies whose suppliers and customers both have rushed panic messages to them. 

Business Standard has reviewed letters written by Lanco to bankers of about half a dozen companies for encashing guarantees. Most of these suppliers like Pentair, Vaas, Intervalve, Kelvion and Emerson are not very big companies and the amount of bank guarantees is less than a crore. “There may be a large number of suppliers. It appears Lanco is trying to take out whatever money it can get before insolvency is declared,” said a source. 

A Lanco spokesperson denied the encashment had anything to do with insolvency proceedings. 

“The suppliers are for a solar manufacturing project where Lanco is the contractor. Lanco has provided these amounts as advance to the suppliers but progress is lacking for the past 10 months. The total amount of bank guarantees encashed from the five suppliers is Rs 3.43 crore,” the spokesperson added. “The invocation of bank guarantees is illegal and fraudulent and contrary to assurances made to suppliers. The suppliers have made no violation of the terms and conditions of the contract calling for invocation. This action will jeopardise the suppliers’ financial position.”

In case of steel companies, the problem of encashment has yet not ensued but a senior executive in one of the companies that is among the large debtors said they have been approached both by their vendors and customers. “We have been paying our suppliers regularly from the working capital that is generated. Such payments will, however, get stalled once insolvency is declared. The suppliers are, therefore, worried,” said the senior executive. Essar Steel, Monnet Ispat, Bhushan Steel, Bhushan Power & Steel and Electrosteel are the five steel companies that are RBI’s list of 12 companies that have been identified for insolvency investigation.

The executive quoted above said they have big companies buying their steel products. “They do not want any supply disruption. In the last one year, we had seen our businesses improving because of the policy measures like minimum support price but with the insolvency investigations, uncertainty has resurfaced,” he said.

The Lanco spokesperson said there was a apprehension among suppliers and customers about the Insolvency and Bankruptcy Code. Hindustan Power, for which Lanco is executing projects, has sought encashment of Lanco’s bank guarantee. 

Lanco has Rs 55,000 crore consolidated debt, of which Rs 11,000 crore is under insolvency. Its lead banker IDBI recently filed an insolvency petition in the National Company Law Tribunal.

Two of Lanco’s suppliers managed to obtain a stay from the Delhi High Court on encashment of bank guarantees submitted by them against advance payment made by Lanco for the supply contracts.

In the case of one company, however, the order came a day after the guarantee was already encashed. Lanco had asked some of these suppliers to renew the guarantees only recently, alleged the person quoted above.

Lanco said bank guarantees worth Rs 470 crore had been submitted by sub-suppliers to the company which were valid as on date in respect of various EPC projects. “Review and encashment of bank guarantees follows a continuous and due process of review based on sub-suppliers and project,” the company spokesperson added.

Lanco recently encashed Rs 15.82 crore of bank guarantees where advances to suppliers were outstanding for up to 18 months, the company spokesperson said. Around 80 per cent of the work covered under these guarantees pertains to a supplier for Lanco’s Anpara project that was completed in 2011. The supplier failed to reimburse the amount Lanco spent on its behalf, the company spokesperson said.