Rescue financiers call for ministry's protection in insolvency proceedings

The government is examining the demand of last-mile financiers to be given priority in insolvency and bankruptcy proceedings, a senior government official told Business Standard. 

The ministry of corporate affairs (MCA) has representations from fund managers and private lenders providing rescue financing to stressed projects. They want protection if an entity lands into the Insolvency and Bankruptcy Code’s (IBC’s) net even after their assistance.

“We come as a knight in shining armour and then that armour is taken away if a company goes into IBC,” said S Sriniwasan, managing director, Kotak Investment advisors. 

Private investors are sitting on billions of dollars of funds due to a constraint in this regard in the IBC law. Kotak alone is looking for opportunities to invest $1.2 billion (Rs 8,600 crore) through its special situation fund and real estate corpus.  “We are unable to provide capital because of our apprehensions about treatment under the insolvency process,” Sriniwasan says. 

Due to the high levels of risk, such interim financing comes at an interest rate which is higher than the prevalent market rate. It is paid off before all other loans on the books of the company.  The IBC process, however, does not give any priority treatment to these lenders. “Funds are wary of investing more than before. There is no clarity over the finality of IBC and cases are not resolved within the specified time frame. The biggest source of FDI (foreign direct investment) is coming in the country through these funds and is getting stuck,” says Saumil Shah, partner, Dhruva Advisors.

Last-mile funding

• The MCA has representations from fund managers and private lenders providing rescue financing to stressed projects
• They want protection if an entity lands into the IBC's net even after their assistance
• Private investors are sitting on billions of dollars of funds due to a constraint in this regard in the IBC law
• Due to the high levels of risk, interim financing comes at an interest rate that is higher than the prevalent market rate

Investors have demanded protection in the pre-IBC stage itself, via agreements with lenders about treatment of “senior debt” in the event of insolvency or liquidation. “There can be an inter-creditor agreement (ICA) to secure the rescue-financiers. How tenable it will be will have to be tested,” the senior government official said. 

Investors have sought MCA’s intervention to have provisions in the IBC which recognise an ICA as valid and binding upon the Committee of Creditors (C0C). “This could be one of the solutions. Currently, a CoC is formed (if IBC is invoked) and ICA becomes a thing of the past. We want the law in this regard to be unambiguous, to avoid litigation,” Sriniwasan said. 

Earlier this month, the government announced a dedicated fund to provide last-mile financing of Rs 25,000 crore for completion of ongoing housing projects. To be implemented through the Alternative Investment Fund structure, it would place the fund ahead of other creditors in terms of claims. The last-mile funding will be treated as priority, under the waterfall mechanism (the order of priority in which the proceeds from sale of liquidation assets are distributed). 

“Today, any vendor can take a (defaulting) company to the IBC. Seniority in waterfall has to be ensured in case this happens,” Sriniwasan added.