State Bank of India (SBI) has sought an urgent meeting with the Reserve Bank of India (RBI) to try and sort out the regulator’s objections to the participation of asset reconstruction companies (ARCs) that has imperiled the Aircel insolvency resolution plan, said people aware of the matter. Aircel’s lenders led by SBI are worried that the company may now have to be liquidated.
The RBI’s opposition to ARCs becoming resolution applicants (RA) could scuttle not just the Aircel plan but that of others such as Reliance Communications (RCom) as well. This would hurt state-run banks such as SBI, since they are the biggest lenders to companies that ARCs are looking to acquire in insolvency cases. “SBI officials will meet RBI’s brass in the next few days,” said one of the persons. “There is pressure from ARCs and other banks as well. SBI is the lead bank in many of the committees of creditors and if this does not get sorted, it will lose the most.”
An SBI spokesperson told ET that, as a matter of policy, it does not comment on individual accounts. The RBI didn’t respond to queries.
RBI has rejected the UV Asset Reconstruction Co. Ltd (UVARCL) resolution plan for Aircel that had been approved by the National Company Law Tribunal.
A Lot at Stake for Lenders
The banking regulator did so on the grounds that ARCs cannot infuse equity in an insolvent company at the resolution stage. This brought into focus the conflict between the insolvency law and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act on whether an ARC can bid for bankrupt firms or not.
While the Insolvency and Bankruptcy Code (IBC) specifically permits ARCs registered with RBI to act as resolution applicants and submit resolution plans, the Sarfaesi Act that precedes it is silent on whether such firms can do so.
“This (the RBI decision on Aircel) could put a spanner in the works for SBI’s recovery plans,” said a senior executive. “The chairman has set out plans to recover at least 11,000 crore through some of these bankrupt accounts in the next two quarters, and if resolution plans are shot down at an advanced stage, it could be detrimental to them, considering how every penny is important during (the Covid) crisis.”
If the RBI refuses to approve UVARCL’s resolution plan, SBI could have to write off its Rs 4,800 crore exposure to RCom and Rs 7,246.14 crore to Aircel or restart the process. SBI is the lead banker in the Aircel CoC. Other lenders include Punjab National Bank, Standard Chartered Bank, China Development Bank, Canara Bank and Bank of Baroda.
Regulatory Gaps
SBI is worried the RBI will also reject UVARCL’s proposal on RCom and its unit Reliance Telecom, said the people cited above. Other resolution processes in which ARCs are involved may also get impacted, said sources. For example, JM Financial ARC, ARCIL and Phoenix have bid for Reliance Naval and Engineering, while Suraksha ARC recently submitted its interest to buy debt-laden realtor HDIL.
Stung by the RBI’s decision on UVARCL-Aircel, the Association of ARCs in India had called on the central bank to issue new guidelines for ARCs with provisions similar to those under the IBC.
In a letter to RBI governor Shaktikanta Das, the association said the banking regulator’s refusal to accept an ARC as an RA would stall insolvency processes in which they are bidders or have won bids. ARCs said they arrange funds to help distressed assets and play a significant role in reviving them.
Source: Economic Times