Restructuring Unlocking The Economic Phases
By Pankaj Jain
RBI vide its various announcements between March, April andMay laid out a series of measures to help businesses in these times. Some of these announcements include:
• Moratorium on EMI’s and interest payments for 6 months ie upto end August 2020;
• Availability of 20% increased credit to MSME’s who have outstanding borrowings upto 25 Crs and turnover less than 100 Crs; and
• Enhanced time periods for trade products like pre and post shipment credit
Whilst, some of these measures will delay “Death” for frail businesses it’s critical to deliberate actions which can revive businesses and the economy. Agility would be critical for revival as companies with obsolete business models, weak fundamentals would perish
For businesses to be sustainable post resumption, one would need to carefully examine a few factors namely:
• Do businesses still need more time in addition to the 6 months given by RBI considering that it may still take a few quarters for them to operate at usual capacity; will businesses be in a position to service accrued interest within the next seven months beginning Sep
• Will banks be incentivized by reduced provisions to help companies restructure / consider additional moratoriums.
• Companies that were struggling prior to March 2020 and were considering voluntary insolvency filings have been asked to wait for six months before such window opens (Does this augur well for any of the stakeholders) and should we carry on dead weight when all concerned stakeholders may be better off with a restart .
• Can a fast track liquidation process skipping the insolvency route be the answer for such businesses.
• Clarity is wanted for businesses which enjoy credit facilities in excess of 25 Crs and also where turnovers exceed 100 Crs . Clearly businesses upto 500 Crs in many industries still fall under the SME or Mid-size category and as these employ larger no of people and hence rescuing some of them clearly becomes imperative.
• A key question would also be on a proposed change in pre-NCLT takeovers. Buyers in such situations negotiate with lenders and take over sustainable debt i.e. a reduced debt but still need to deal with outstanding statutory dues and operational creditors. Will an ordinance involving the other creditor classes see the light of the day .
• Similar to a reorganization scheme (section 231), a mechanism needs to be put in place which boosts fast track M&A and the incoming buyer gets similar waivers on trade creditors and statutory dues.
Quick actions like these will enable a lot many businesses from falling under or getting rescued.
Clearly the need is preventing the assets from deteriorating, rescuing viable businesses and importantly preserving jobs and Intellectual property. This would also herald the significance of turnaround specialists and firms that can help businesses improve performance in quick time frame.
International advisory houses and Investment banks specializing in fast track M&A and who can leverage on global buy side relationships will also come to the front.
Much like the advent of IBC, signaled a new paradigm for Indian businesses, the need is clearly to have a Restructuring Framework in place where all involved stakeholders “sacrifice” or for better understanding “contribute” in proportionate measure for a better tomorrow!!