BANKING Resolution Tracker #1: The game begins

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1 SECTOR UPDATE BANKING Resolution Tracker #1: The game begins India Equity Research Banking and Financial Services We, at Edelweiss, envisage stress asset resolution to be an enduring theme for the banking sector over the next few years. With stress recognition in the last leg (bulk of NPL recognition already done), we believe the pace, swings and probabilities/possibilities of asset resolution will drive financial and stock performance of corporate-focused banks. Hence, we are pleased to launch Resolution Tracker a series to regularly track developments on this front and put forth our take/analysis. In this inaugural series, we take a look at: Prevailing resolution framework in India (SICA / BIFR / SARFAESI) and regulator s forbearance schemes announced from time to time. Recent legislative and regulatory changes passage of Insolvency & Bankruptcy Code (IBC) and constitution of National Company Law Tribunal (NCLT). What has changed and can it be a potential game changer in overall scheme of things? How is the ecosystem evolving and effectiveness of IBC process till date. Deep dive into specific accounts referred to NCLT, their status, the probability of success and probable resolution framework. Implications on the banking sector. Resolution: Finally, walking the talk Besides the regulator referring 12 large accounts, financial creditors (banks, ARCs, NBFCs) and corporate debtors themselves are equally proactive in dragging cases under the new IBC. This has led to rising pace of filing insolvency resolution >250 cases admitted for resolution by NCLT compared to ~30 by March Of this, ~25% are referred by financial creditors and >30% by the company itself. Recently, RBI is understood to have sent to banks the second list of >30 firms to refer to NCLT..confluence of entire ecosystem key positive The ecosystem for asset resolution is beginning to come alive with various legislative and regulatory changes initiated over the past 2 months, leading to swifter resolutions than anticipated. An enabling and supportive operational environment is being created for collaboration among banks, ARCs, PE, asset management companies and resolution professionals. Our belief is vindicated by the fact that of the 12 accounts recommended by RBI, all 12 have been referred to NCLT and 11 cases admitted by IBC. Committed bids are in; buyouts, liquidation, haircuts ahead With respect to impact on banks, these 12 NCLT referred accounts constitute 20-30% of GNPLs on which banks carry provisioning in the 40-50% range; balance provisioning will be required over the next 3 quarters (10-15% of FY18 operating profit). Timely interventions and transparent price discovery are likely to support effective resolution 9 of 12 cases have already received committed bids. Our interactions with industry experts suggest that hard liquidation will be restricted to only a few accounts. Also, we peg sustainable debt at 35-40% of overall debt (implying haircut upwards of 50%). Nilesh Parikh nilesh.parikh@edelweissfin.com Kunal Shah kunal.shah@edelweissfin.com Prakhar Agarwal prakhar.agarwal@edelweissfin.com Malav Simaria malav.simaria@edelweissfin.com August 30, 2017 Edelweiss Research is also available on 1 Edelweiss Securities Limited Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

2 Banking and Financial Services The Insolvency and Bankruptcy Code, the National Company Law Tribunal, a new arbitration framework and a new IPR regime are all in place. New commercial courts have also been set up. These are just a few examples of the direction in which we are going. My Government is strongly committed to continue the reform of the Indian economy. Hon ble Prime Minister, Shri Narendra Modi History so far: prevailing resolution framework and its nuances One of the major impediments faced by banks is slower resolution and, consequently, lower recoverable value following erosion in value of assets. The gravity of the situation can be assessed from the fact that, on an average, it takes more than 4 years to wind up a company in India, more than twice the time taken in China and US ( years). In the process, creditors in India recover only USD0.25 of USD1.00 (on NPV basis, due to erosion in value of assets) compared to USD0.36 in China and USD0.80 in the US (Source: World Bank report). Government s reform measures to manage banks NPAs The government has devised various initiatives to provide banks with a structured platform to manage their mounting NPAs and keep pace with international financial institutions. However, these measures have lagged the rapidly changing commercial practices and financial sector reforms, leading to slow recovery of defaulted loans and mounting NPAs of banks & financial institutions. The latest measure is implementation of the Bankruptcy Code, which could be a potential game changer. Recovery/ resolution steps that can be initiated by banks While there is no rule book that is followed, a bank has to first identify a rationale for any account slipping into NPLs and has to be tackled through several available options. Our interactions with various stakeholders indicate that banks generally follow one or a combination of the below listed steps (not listed in order of preference). Fig. 1: Resolution steps that can be initiated by banks. Restructuring the account: Negotiating deal by reducing interest /providing moratorium or by using 5:25 scheme Resolution Induct additional partners, additional capital, management change (SDR) which can help turn the unit viable Scheme for Sustainable Structuring of Stressed Assets (S4A) Further assistance if it will help unit to revive, but take additional collateral security or increase tenor (Restructuring) Source: Edelweiss research Fig. 2:. which can be followed by recovery efforts Court or legal proceedings (DRT) Recovery Forcing unit to honour obligation by declaring unit as wilful defaulter and take action Recovery under various acts (SARFESI Act etc) Source: Edelweiss research Despite so many available tools, why has resolution failed? The regulator has, from time to time, introduced several forbearance schemes, viz., JLF formation, CDR, SDR, S4A, 5:25 scheme. However, specific conditionalities attached to schemes, concern on genuineness of case (mere postponing of problem), introduction of new rules and lack of resolution clarity have failed to generate the desired impact and dimmed the corresponding success rate of these schemes. 2 Edelweiss Securities Limited

3 Sector Update Table 1: Resolution steps that can be initiated by banks and their shortcomings Scheme Shortcomings Restructuring More than 75% (by value) and 60% (by number) of bankers should agree which took lot of time. Rise in the failure rate of cases referred to CDR (on 3 year lagged basis cases withdrawn are >40% of approved cases). SDR Challenges of finding new non-related promoter in stipulated time. A problem of haircut (a decision on quantum), leading to disagreement among borrowers Higher Debt/MCap ratio implying conversion to equity would not result in meaningful reduction in debt burden. S4A The conundrum of deciding on sustainable part. The challenge of higher unsustainable debt implying conversion to equity which would have lower current realisable value. 5:25 More of longer gestation scheme limited to few sectors which restricts the ambit of applicability. Source: Edelweiss research Hurdles in recovery arrangements Now, let us delve into the shortcomings/loopholes of the current recovery efforts which render the entire process cumbersome and ineffective. Fig. 3: Various government measures Elaborate and multi-layered structure: One of the primary reasons for delay in the bankruptcy process in India is the existence of multiple laws governing insolvency. Besides the Companies Act, 2013, bankruptcy is dealt with by 3 major legislations Sick Industrial Companies (SICA), Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (RDDB Act), and the Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI). As a result, 4 different agencies High Courts, Company Law Board, Board for Industrial & Financial Reconstruction (BIFR) and Debt Recovery Tribunals (DRTs) have overlapping jurisdiction, leading to delay in overall resolution SICA/BIFR The Recovery of Debts Due to Banks and Financial Institutions RDDBI Act SARFESI Act Bankruptcy Code Source: Edelweiss research Companies misusing tools to delay legal action by banks: Many troubled companies in India resort to BIFR as an escape route to delay legal action by banks for debt recovery even as their loan restructuring under the CDR cell and other such mechanisms fail, as no legal action can be taken against a company that has been referred to BIFR (however, under SARFAESI Act, BIFR does not hold good). Lacking infrastructure: One of the crucial reasons for slow proceedings currently is the lack of infrastructure in the current legal scheme. The predominant problem with BIFR has been the government s failure to appoint adequate members on the Bench, which delays adjudication of matters. The fate of DRTs is similar there are a number of states that do not have DRTs 3 Edelweiss Securities Limited

4 Banking and Financial Services The Insolvency and Bankruptcy Code, 2016 provides for a market determined, time-bound mechanism for orderly resolution of insolvency, wherever possible, and ease of exit, wherever required. Dr. M. S. Sahoo, Chairperson, IBBI and banks & financial institutions in these states have to go to DRTs located in other states having jurisdiction over their area, delaying the entire process. Insolvency & Bankruptcy Code: A game changer The Bankruptcy Code is a unified code which aims to resolve insolvency for all companies, limited liability partnerships, partnership firms and individuals. Further, the most critical part is the strict resolution timeline of 180 days (with 1 extension of 90 days in complex cases), which is starkly different from certain current arrangements which permit the debtor / promoter to seek extensions beyond limit. The Insolvency Resolution Process (IRP) can be initiated in case of a default and run for as long as 180 days. IRP is overseen by an Insolvency Professional (IP) who is given substantial powers. IP makes sure that assets are not siphoned from company and initiates a check of company s transactions for past 2 years, to look for illegal diversion of assets. Such diversion will attract criminal charges. While the IRP is in process, the law enshrines a calm period wherein creditors stay their claims. This gives a better chance to the company to survive as a going concern. For the 180 days for which the IRP is in operation, the creditors committee will analyse the company, hear rival proposals and make up its mind about the course of action. To facilitate the need for quick and accurate data information utilities will be set up which hold an array of information about all firms at all times. When the IRP commences, within less than a day, undisputed and complete information will become available to all persons involved in the process and thus address one of the key source of delay. When 75% creditors agree on a revival plan, it will be binding on balance creditors. If, in 180 days, the revival plan fails to gain support of 75% creditors, the company goes into liquidation. In limited circumstances, if 75% of the creditors committee decides that the complexity of a case requires more time for the resolution plan to be finalised, a one-time extension of up to 90 days is possible with prior approval of the adjudicator. This is starkly different from certain current arrangements which permit the debtor / promoter to seek extensions beyond limit. Fig. 4: Process of resolution/recovery under Bankruptcy Code Default Information utilities (Holds an array of information about all firms at all times) Revival plan agreed Yes Promoter buyback with some restructuring Management change with some restructuring Restructuring Insolvency resolution process (IRP) overseen by insolvency professional and calm period No Merger Transfer sale etc Liquidation Source: Bankruptcy Law Reforms Committee, Ministry of Finance, Edelweiss research 4 Edelweiss Securities Limited

5 (Nos) Progress so far Sector Update From admission of 7 cases under the IBC in January by various NCLT benches, the number has now gone up to 68 in August. In the past 3 months, 160 cases were admitted compared to merely ~30 cases in January-March, according to data collated from NCLT benches at 10 locations, taking the total number of cases to >250. Chart 1: Rising number of cases admitted to NCLT under IBC Jan Feb Mar Apr May Jun Jul Aug Number of cases Source: NCLT, Insolvency & Bankruptcy Board of India Having said that, analysis of the data indicates that IBC is being used not only by financial creditors (banks, ARCs, NBFCs), but also by companies or corporate debtors. Of this, ~25% are referred by financial creditors and >30% by the company itself. Chart 2: Proportion of IBC cases Financial Creditors 23% ARC 3% Operational creditors 42% Corporate debtors 32% Source: NCLT, Insolvency & Bankruptcy Board of India In addition, the RBI too issued guidelines focusing on NPA resolution and shortlisted 12 accounts accounting for ~25% of the sector s NPA to be processed under the Insolvency & Bankruptcy Code (IBC). This has set a credible roadmap for commencement of the resolution process. 5 Edelweiss Securities Limited

6 Banking and Financial Services Also, the central bank is understood to have sent a second list of companies that banks can refer to NCLT. A few of the names that could potentially be on the list are Videocon Industries (gross debt of INR475.5bn), Jindal Stainless (INR33.6bn), Jaiprakash Power Ventures (INR210.9bn), Aban Offshore (INR120.3bn), IVRCL (INR35.7bn), Uttam Galva Steels (INR50.4bn), Punj Lloyd (INR61.2bn), Soma Enterprises (INR18.9bn), Shree Renuka Sugars (INR60.1bn) and many more (Source: Media articles) Table 2: Things moving pretty swiftly under IBC, 11 of the 12 cases referred proposed by RBI are already admitted Name Sustainable Debt Promoter Debt as a (%) Lead Bank IRP Appointed Sector (INR bn) Stake (%) of Total Debt Status Prospective Buyer ABG Shipyard 69, ICICI Bank Sundaresh Bhat -BDO India Shipping - Listed 9.7 Admitted Liberty House Alok Industries 248, SBI Ajay Joshi- Grant Thornton Textile - Listed 28.8 Admitted Vardhaman, Trident, Piramal-Bain stressed assets unit, AION Capital, SSG Capital Amtek Auto 105, Corporation Bank Dinkar T. Venkatsubramanian - E & Y Auto - Listed 52.4 Admitted DA Capital, SSG Capital Bhushan Power 372, PNB Mahender Kumar Steel -Unlisted NA Admitted & Steel Khandelwal- BDO India Bhushan Steel 444, SBI Vijaykumar V Iyer - Deloitte Steel - Listed 57.8 Admitted JSW Steel, Piramal- Bain, Oaktree Capital, Lone Star Funds, AION Capital, SSG Capital Electrosteel Steels Era Infra Engineering Essar Steel India 123, SBI Dhaivat Anjaria - PWC Steel - Listed 45.2 Admitted Tata Steel, Dalmia 100, Union Bank, Prideco Commercial Projects 456, SBI Satish Kumar Gupta -Alvarez & Marsal Ajay Joshi- Grant Thornton EPC - Listed 66.4 Order Reserved Steel -Unlisted 98.0 Admitted JSW Steel, Tata Steel, POSCO Jaypee Infratech 86, IDBI Bank Anuj Jain - BSSR & Co. Road - Listed 71.6 Admitted Brookfield Jyoti structures 51, SBI Vandana Garg - BDO India EPC - Listed 18.2 Admitted Lanco Infratech 430, IDBI Bank Savan Godiawala - Deloitte EPC - Listed 58.5 Admitted Monnet Ispat & Energy 120, SBI Sumit Binani -Grant Thornton Steel - Listed 25.3 Admitted JSW Steel TOTAL 2,609,390 Source: NCLT, Edelweiss research, Media articles Four key reforms in India were passed in First, a bankruptcy and insolvency code was enacted, making it easier to close failing businesses and recover debts World Bank Group Flagship Report, Global Economic Prospects: Weak Investments in Uncertain Times, January 2017 Effectiveness of IBC and NCLT process till date How has NCLT and judicial system responded With significant push from the government and RBI, IBC cases are taken hands on by the tribunal to ensure judgments are heard and brought to a closure as soon as possible and are not stalled by delaying tactics used by companies. The ruling of Gujurat High Court dismissing Essar Steel India s appeal against RBI s order was a boost to the government, which in May 17 had tweaked Indian banking laws to empower the RBI to tackle the country's bad debt issue. Board of the company remains suspended during the resolution process and resolution professional get the management and operational control of the entity. However in some cases, before the board is suspended, companies are looking to strengthen executive management to assist the IRP in managing the affairs of the company during the resolution process. 6 Edelweiss Securities Limited

7 Sector Update In case of Lanco Infratech, NCLT admitted the company s objection for the appointment of proposed IRP who is already engaged in other assignments. It cited that prima facie it is also of the view that proposed IRP would not find sufficient time to act as IRP for such a complex case while most of the activities prescribed in the IBC code are time bound. In case of Monnet Ispat, the bench advised SBI to reconcile the claim amount in the petition with the default amount SBI has filed. Later, lead counsel for SBI clarified that the firm defaulted on loans worth INR15.4bn owed to SBI against claim amount of more than INR22.4bn and remaining is due for repayment later. On similar grounds, in case of Innoventive Industries filed by ICICI Bank, the bench pulled up the company s lawyers to come sufficiently prepared for hearings as the court s time is valuable. How have corporates responded? As judicial officers at NCLT and IRP fight to bring cases to a logical resolution in a timebound manner, industrialists and bankers, who resorted to the judiciary as a stalling mechanism, are beginning to see a different reality. However in several cases, NCLT has upheld its decision that all proceeding against corporate debtor in any court of law shall stand stayed on the insolvency commencement date. Even if there were winding up litigations pending before the high court, NCLT has admitted insolvency and bankruptcy petition as no order of liquidation has been passed nor official liquidator has been appointed. How is the ecosystem evolving The ecosystem for asset resolution is beginning to come alive with various legislative and regulatory changes initiated over the past 2 months and resolutions can be swifter than anticipated. Our belief is vindicated by the fact that of the 12 accounts recommended by RBI, all 12 accounts have been referred and 11 cases admitted to IBC. An enabling and supportive operational environment is being created for collaboration among banks, ARCs, PE, asset management companies and resolution professionals 100% ownership by sponsors, higher ceiling of 100% for FDI in ARCs, pass through status to ARC trusts for income tax, exemption from stamp duty, enabling trading of security receipts, etc. Key monitorables: While this is a good start, we need to check the infrastructure to deal with so many cases in a time-bound manner. There are indications that the number of IRPs and related infrastructure are stretched to timely finish cases on time. Hence, we anticipate some increase in timeline for resolutions. Implications for the banking sector With respect to impact on banks, these 12 NCLT referred accounts constitute 20-30% of GNPLs on which banks carry provisioning in the 40-50% range; balance provisioning will be required over the next 3 quarters (10-15% of FY18 operating profit). Timely interventions and transparent price discovery are likely to support effective resolution 9 of 12 cases have already received committed bids. We peg sustainable debt at 35-40% of overall debt (implying haircut upwards of 50%). 7 Edelweiss Securities Limited

8 Banking and Financial Services Our interactions with industry experts suggest that hard liquidation will be restricted to only a few accounts. Table 3: 12 NCLT referred accounts constitute 20-30% of GNPLs; current coverage of 40-50% # of NCLT referred account Exposure (INR bn) Total GNPA (INR bn) Exposure /GNPA (%) Existing Prov Cov (INR bn) Existing Prov Cov (%) Incremental prov required (INR bn) Incremental Prov as a % of PPOP Bank Name Public Sector Banks State Bank of India , Bank of Baroda Punjab National Bank NA NA Union Bank of India Canara Bank NA Bank of India NA NA Private Banks ICICI Bank Indusind Bank NA NA Yes Bank NA NA Axis Bank NA NA Kotak Mahindra Bank NA NA NA NA Karnataka Bank NA NA South Indian Bank NA NA IDBI Bank NA NA NA Source: Company, Edelweiss research 8 Edelweiss Securities Limited

9 Deep dive into specific accounts referred to NCLT advised by RBI ABG Shipyard Sector Update Total Debt - INR69.5bn Sustainable Debt Estimate % Lead Bank - ICICI Bank IRP - Sundaresh Bhat, BDO India Commencement Date - 01/08/2017 Expected Resolution Date - 28/01/2018 Management s Perspective ABG Shipyard has admitted that it is facing deep financial crisis and has defaulted on repayment of loans under the CDR scheme, with the same being discontinued from March 1, 2017, onwards. Gujarat High Court - As many as 20 unsecured creditors of the company have approached the Gujarat high court for winding up the company Bank s Perspective ICICI Bank argued that since no winding-up order had been delivered by the high court or an official liquidator, NCLT can admit the insolvency and bankruptcy petition Lenders have put the shipyard on block attempting to find a buyer for their 51% stake, which they got post conversion of debt into equity. However, they failed to find any buyers. Current Status ABG shipyard s CIRP was initiated on August 1, UK-based Liberty House has proposed a new business model to NCLT as part of its acquisition plan Source: Media, Edelweiss Research, NCLT, IBBI 9 Edelweiss Securities Limited

10 Banking and Financial Services Alok Industries Total Debt - INR bn Sustainable Debt Estimate % Lead Bank - SBI IRP - Ajay Joshi, Grant Thornton Commencement Date - 18/07/2017 Expected Resolution Date - 14/01/2018 National Company Law Tribunal (NCLT) Dismissed an application by Industrial Commercial Bank of China (ICBC), which sought to stop or defer NCLT from passing an order on SBI's application. All proceeding against corporate debtor in any court of law shall stand stayed on the insolvency commencement date. Bank s Perspective Lenders are not prepared for haircuts - overall exposure of banks and trade suppliers is at least 3x the value being assigned by potential bidders. IDBI Bank has withdrawn nomination of Mr. Rajeev Kumar from the Board of Directors. Current Status Alok Industries CIRP started on July 18, AION Capital, a special situations fund set up by US PE Apollo Global Management and ICICI Venture and pan-asian reconstruction specialist SSG Capital have set sights on controlling stake in Alok Industries Source: Media, Edelweiss Research, NCLT, IBBI 10 Edelweiss Securities Limited

11 Sector Update Amtek Auto Total Debt - INR 105 bn Sustainable Debt Estimate % Lead Bank - Corporation Bank IRP - Dinkar T. Venkatsubramanian, E&Y Commencement Date - 24/07/2017 Expected Resolution Date - 20/01/2018 Management s Perspective The company did not object to the admission and requested the court to also consider its resolution plan. The auto component maker had been trying to sell various group businesses to reduce debt on its books, ever since it defaulted on its bond payment of INR8bn in September Amtek Auto s founder and chairman, Mr Arvind Dham, was in talks to sell some of his personal assets in auto ancillary space to meet some of the group s debt obligations. Bank s Perspective Lenders have asked the company to either repay the loans or convert the outstanding into equity shares or warrants. Global PE, KKR, has launched bankruptcy proceedings against Amtek Auto s overseas subsidiary, which is itself in India s bankruptcy court. Current Status CIRP was initiated on July 24, After studying the records of the company, it appeared that Amtek Auto has been operating at a low capacity utilisation level and there is an immediate need for working capital. Insolvency professional has sought the cooperation of all creditors to keep the company as a going concern for a time-bound resolution and to protect and preserve the value of the company Source: Media, Edelweiss Research, NCLT, IBBI 11 Edelweiss Securities Limited

12 Banking and Financial Services Bhushan Power & Steel Total Debt - INR 372 bn Sustainable Debt Estimate % Lead Bank - PNB IRP - Mahender Kumar Khandewal, BDO India Commencement Date - 26/07/2017 Expected Resolution Date - 22/01/2018 Management s Perspective The company had initiated debt restructuring proceedings earlier, but lenders could not agree on a solution. Current Status Corporate Insolvency Proceeding was initiated by NCLT as on July 26, Singapore based creditor (shipping chartering service provider) has won a foreign arbitration award against Bhushan Power & Steel and wants it to be enforced under a different Act. Court will hear whether the moratorium declared under IBC would be applicable in settling the dues of the Bhushan Power creditor Source: Media, Edelweiss Research, NCLT, IBBI 12 Edelweiss Securities Limited

13 Sector Update Bhushan Steel Total Debt - INR 445 bn Sustainable Debt Estimate % Lead Bank - SBI IRP - Vijaykumar V Iyer, Deloitte Commencement Date - 26/07/2017 Expected Resolution Date - 22/01/2018 Management s Perspective They stated that 65% of the amount alleged to be in default is in the nature of working capital and hence alleged claim suffers from blatant misrepresentations, exaggerations and are misconceived. Bank s Perspective The JLF has been trying to resolve the issue since past 2 years, but has failed to come up with a solution till date. SBI s counsel stated the difference was there as the dues of SBI s subsidiaries, now merged with the larger bank, was not considered. Five subsidiary banks of SBI were merged with it on April 1, Current Status On July 26, 2017 bankruptcy proceeding commenced. JSW Steel-Piramal-Bain, Oaktree Capital, Lone Star Funds, SSG Capital and AION Capital Partners are among the investors interested in acquiring a stake in the company Source: Media, Edelweiss Research, NCLT, IBBI 13 Edelweiss Securities Limited

14 Banking and Financial Services Electrosteel Steels Total Debt - INR bn Sustainable Debt Estimate % Lead Bank - SBI IRP - Dhaivat Anjaria, PWC Commencement Date - 21/07/2017 Expected Resolution Date - 16/01/2018 Management s Perspective Management is blaming the failed debt restructuring plan of September 2013 for the company s current woes. It claims that lenders had agreed to extend fresh loan of INR13 bn under CDR. Management was not averse to RBI s insolvency proceedings. Bank s Perspective Lenders had initiated SDR on June 8, 2015 and on January 7, 2016 the shareholders in an EGM approved the JLF s decision to convert a part of the principal restructured debt to equity. Current Status: Electrosteel s CIRP commenced on July 21, The meeting of the Committee of Creditors of Electrosteel Steels, eventually approved a resolution plan under the Insolvency and Bankruptcy Code. Source: Media, Edelweiss Research, NCLT, IBBI 14 Edelweiss Securities Limited

15 Sector Update Era Infra Engineering Total Debt - INR bn Sustainable Debt Estimate % Lead Bank - Union Bank, Prideco Commercial Projects IRP - Ajay Joshi, Grant Thornton Commencement Date - Order reserved Management s Perspective Management is in favour of the insolvency process as it has a large amount of funds tied up in arbitration claims that could help in its revival and enable it to repay debt. It supports the intention of the Code to amalgamate all company and insolvency matters to one forum for adjudication. The company does not agree with the amount claimed by Union Bank of India. It has challenged the NCLT judgement on the grounds that Prideco Commercial had not served notice to the company under a specific section of the IBC. In the Delhi High Court, 18 winding-up petitions, filed by various operational and financial creditors of the company, are pending. NCLT The company was dragged to the NCLT by one of its operational creditors, Prideco Commercial Projects Pvt. Ltd, for non-payment of dues. Current Status On July 26, 2017 NCLT reserved its order on whether the insolvency proceedings are maintainable or not as there are several winding-up petitions pending against the company before the Delhi High Court. NCLT has referred insolvency proceedings to the president of the tribunal for transferring it to a larger bench or to take any other decision deemed fit. Source: Media, Edelweiss Research, NCLT, IBBI 15 Edelweiss Securities Limited

16 Banking and Financial Services Essar Steel India Total Debt - INR 456 bn Sustainable Debt Estimate % Lead Bank - SBI IRP - Satish Gupta, Alvarez and Marsal Commencement Date - 02/08/2017 Expected Resolution Date - 29/01/2018 Management s Perspective In revival mode and initiation of insolvency proceedings would disrupt debt resolution process with JLF. Complexity of group coupled with appointment for new resolution process will delay the process. Categorised bank resolution under Sustainable Structuring of Stressed Assets (S4A). The Gujarat High Court dismissed Essar Steel s plea against the Reserve Bank of India s plans to resolve 12 large stressed accounts in June 17. The Supreme Court on August,16 restrained Essar Steel India, already facing insolvency proceedings, from undertaking any construction activity on the 2.76 lakh square metres of alleged forest land on the outskirts of Surat in Gujarat, estimated to be worth INR60bn. Bank s Perspective No payments made by petitioner since April 16 No record to show that joint lenders forum (JLF) had approved the restructuring scheme Current Status CIRP commenced on August 2, Mega Essar- Roosneft deal cheers lenders Essar Steel s lenders will be holding their first meeting on August 31, 17 to decide on a resolution plan to deal with the company's debt. Source: Media, Edelweiss Research, NCLT, IBBI 16 Edelweiss Securities Limited

17 Sector Update Jaypee Infratech Total Debt - INR 86 bn Sustainable Debt Estimate % Lead Bank - IDBI Bank IRP - Anuj Jain, BSSR & Co. Commencement Date - 09/08/2017 Expected Resolution Date - 05/02/2018 Management s Perspective The company has withdrawn all the objections keeping in mind stakeholders interests including home buyers and depositors. Earlier this year, Jaypee Infratech sold its cement and power assets. National Company Law Tribunal (NCLT) All the personnel connected with the company including promoter are under legal obligation to extend every assistance and cooperation to the IRP. NCLT, through a public notice, directed homebuyers, employees and those falling under other categories of creditors in projects of the Jaypee Group to file their claims on or before August 24, 17 with the IPR Bank s Perspective Lending banks have ordered a forensic audit to ensure that loans provided to Jaypee Infratech are being used for the purpose they were sought. Buyers in the company s real estate project have filed case against the company with the National Consumer Disputes Redressal Commission seeking full compensation/refund of the money deposited by them. Current Status Corporate Insolvency Proceeding was initiated by NCLT as on August 9, 2017 Supreme Court agrees to hear PIL by a homebuyer seeking a stay on NCLT s insolvency order against Jaypee Infratech Insolvency resolution professional rules out refund possibility for home buyers in Jaypee case Source: Media, Edelweiss Research, NCLT, IBBI 17 Edelweiss Securities Limited

18 Banking and Financial Services Jyoti Structures Total Debt - INR 51.6 bn Sustainable Debt Estimate % Lead Bank - SBI IRP - Vandana Garg, BDO India Commencement Date - 04/07/2017 Expected Resolution Date - 31/12/2017 Management s Perspective A proposal from potential buyers is in an advanced stage to acquire the company as a going concern There were no objections to any debt restructuring or insolvency proceeding initiated by lenders as well. Annual report for 2016 stated that the restructuring package as envisaged by the JLF in 2015 failed as the working capital facility was not released by the banks. Banker s Perspective SDR was also invoked and since then, banks have been trying to sell their 51% stake in the company with no success The lenders pursued sale of the company to the Dubai-based Amin group but the proposal did not go through as it would have involved significant haircut. Current Status Corporate Insolvency Proceeding was initiated by NCLT as on July 4, Source: Media, Edelweiss Research, NCLT, IBBI 18 Edelweiss Securities Limited

19 Sector Update Lanco Infratech Total Debt - INR 430 bn Sustainable Debt Estimate % Lead Bank - IDBI Bank IRP - Savan Godiawala, Deloitte Commencement Date - 07/08/2017 Expected Resolution Date - 03/02/2018 Management s Perspective Lanco Infratech is only a holding company deriving majority of value from its investment and EPC work it undertakes for its SPVs. Initiating CIRP on holding company alone without simultaneous resolution of under-construction SPVs would result in catastrophic impact and substantial loss to creditors. The company has been trying to sell its assets in its bid to reduce debt, though it has not succeeded. Corporate guarantees have not been invoked and liability is contingent in nature and has not crystallized into debt. Requested a cost overrun facility from Power Finance Corporation which was approved before IDBI Bank filed for insolvency. Objected the appointment of IRP as he is currently engaged in other assignments Banker s Perspective In July 2015, bankers invoked SDR scheme in Lanco Teesta Hydropower to convert debt to equity and recover their exposure through a sale. However, lenders are yet to make any headway in this sale. Current Status Corporate Insolvency Proceeding was initiated by NCLT as on August 7, Proposed IRP would not find sufficient time to act as IRP and appointed Savan Godiawala as IRP Source: Media, Edelweiss Research, NCLT, IBBI 19 Edelweiss Securities Limited

20 Banking and Financial Services Monnet Ispat & Energy Total Debt - INR 120 bn Sustainable Debt Estimate % Lead Bank - SBI IRP - Sumit Binani, Grant Thornton Commencement Date - 18/07/2017 Expected Resolution Date - 13/01/2018 Management s Perspective Sajjan Jindal led-jsw Steel was a prospective buyer of Monnet Ispat, but delayed the same stating the proceedings in the tribunal may jeopardise the deal. Bank s Perspective Lenders invoked SDR in August 2015 to convert debt into equity and now control 51% of the company. However, SDR and CAP is deemed to have failed. JSW Steel s offer bid was rejected by lead creditor, SBI in the current form. Being pulled up by NCLT over ambiguities in claim submission the bank clarified that INR 15 bn is in default as of now and balance it will be claim before the creditors' committee Current Status Monnet Ispat s CIRP was initiated on July 18, JSW Steel is expected to submit a revised bid after the earlier offer being unacceptable to lead banker SBI Source: Media, Edelweiss Research, NCLT, IBBI 20 Edelweiss Securities Limited

21 Sector Update Aditya Narain Aditya Narain Head of Research Edelweiss Securities Limited, Edelweiss house, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services Allahabad Bank, Axis Bank, Bharat Financial Inclusion, Bajaj Finserv, Bank of Baroda, Capital First, DCB Bank, Dewan Housing Finance, Equitas Holdings Ltd., Federal Bank, HDFC, HDFC Bank, ICICI Bank, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, Repco Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian Bank, Union Bank Of India, Yes Bank Recent Research Date Company Title Price (INR) Recos 31-Jul-17 Shriram Transport Finance Operationally strong; merger uncertainties prevail; Result Update 1,017 Buy 28-Jul-17 LIC Housing Finance Margins temper; individual growth improves; Result Update 721 Buy 28-Jul-17 IDFC Bank Soft quarter; merger uncertainties loom large; Result Update 61 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 21 Edelweiss Securities Limited

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