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Step aside from Nirav Modi and Vijay Mallya, and Rishi Agarwal – a new poster boy is here to take top honors for cheating the bankers. The Central Bureau of Investigation (CBI) in the last week of June booked Kapil Wadhawan and Dheeraj Wadhawan of DHFL for defrauding banks of ₹34,615 crore, making it the largest fraud case investigated by the agency central. Before the Wadhawans, Agarwal, the 56-year-old owner of Surat-based ABG Shipyard, was under the CBI lens for allegedly cheating a consortium of 28 banks out of ₹22,842 crore by diverting funds to entities connected with promoters. Before Agarwal, diamond dealers Nirav Modi and his uncle Mehul Choksi had topped the fraud league table with more than Rs 14,000 crore in fees, followed by Vijay Mallya with Rs 9,900 crore.

What makes the ABG case stand out is that it is one of the dirty dozen bad loan accounts that were referred for resolution under the Bankruptcy Code of India 2016, following the dictate of the Reserve Bank of India (RBI). ) in June 2017. By the way, since 2013, bankers have been struggling with the ABG account. After attempting a loan consolidation under the Corporate Debt Restructuring mechanism in March 2014, it was declared an NPA in 2016 and admitted to insolvency proceedings in August 2017. In April 2018, the NCLT (National Company Law Tribunal) issued an order of liquidation and in the same month, Ernst & Young was appointed by the consortium for a forensic audit. After the trustee was unable to find buyers, the account was declared fraudulent in April 2019.

Of the 12, only eight cases have found resolution so far. Two cases (Lanco Infratech and ABG) ended in liquidation and two (Jaypee Infratech and Era Infra Engineering) are currently in insolvency proceedings. Against the cumulative claims of ₹2.26 lakh crore from the balance of eight accounts, only ₹1.15 lakh crore were made and only Essar Steel accounted for 83% of the claims realization of ₹49,473 crore, while Alok Industries it scored a lousy 17% against claims at ₹29,523 crore (See: Good but not good enough).

Lanco Infratech, which had five business verticals (EPC, energy, natural resources, solar and infrastructure) when it filed for bankruptcy in August 2017, is in the process of being liquidated. In 2017, the company had an installed capacity of 3,475 megawatts (MW) and 4,536 MW under construction, while the EPC division executed orders worth more than Rs 15,680 million.

Even as Lanco is being liquidated, its 10 subsidiaries, which own a single asset or a group of assets, are facing their own corporate insolvency proceedings. As a result, the structure of the holding company and the special purpose vehicle (SPV) is creating a challenge in assessing the correct value of the assets held. For example, Lanco Thermal, the group’s thermal power plant holding company, has 15 SPVs. In addition, the subsidiaries that own the assets have different lenders through project finance. In the following five years, the value of the assets would also have experienced a strong erosion.

As for the other two cases, while ICICI Bank is challenging Suraksha ARC’s bid for Jaypee in court, the lenders have yet to approve Era Infra’s resolution plan on the legality of bundling the company’s SPVs with the holding. That speaks volumes about the much-touted effectiveness of IBC in paving the way for faster resolution.

While 457 cases are in corporate insolvency proceedings as of December 2021, more than triple the number are in liquidation. In terms of realization as a percentage of their claims, financial creditors recovered only 34.8% through insolvency and a much lower figure than 6.8% through liquidation. However, a former IBC official points out that the Code cannot be blamed for the losses.

“The problem is that when companies take over the IBC, creditors can say we want Rs100, but the company has assets worth Rs20. Possibly 10 or 20 years ago, when it gave money, the company may have had assets of ₹100. It’s similar to having a terminally ill patient, where the hospital can’t do anything. If you have allowed the value of the asset to deteriorate from ₹100 to ₹20 or ₹5, you will only get the same amount. The market is very cruel and will not give value just like that”.

Incidentally, the Standing Committee on Finance had raised concerns about the Liquidation Process Regulations 32 of the Code, which deals with the sale of a corporate debtor or its business as a going concern. But, the Supreme Court had held a hearing in the case Arcelor Mittal India v. Satish Kumar Gupta & Ors argues that “…If there is a settlement applicant who can continue to run the corporate debtor as a going concern, every effort should be made to try to see that this is possible”.

“Unlike liquidation, where the goal is to dissolve the entity, the main goal of liquidation is to sell the asset at a maximum value for realization and not necessarily kill the entity,” says Vinod Kothari, founder of the firm. financial consulting. , Vinod Kothari Consultants.

The IBC official quoted above explains that if a company with an asset of ₹20 gets ₹37-38 according to the IBC, the lenders get 180% of the liquidation value. “So the choice is to choose between resolution or settlement, i.e. 180% vs ₹5. If you liquidate, you are likely to get more or less the value, less the cost of the transaction”, says the official.

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