Banks Will Soon Take NCLAT To Supreme Court On Essar Steel Order, Says SBI Chairman
Rajnish Kumar, chief executive officer of State Bank of India Ltd., speaks during a panel session on day two of the World Economic Forum (WEF) in Davos. (Photographer: Jason Alden/Bloomberg)

Banks Will Soon Take NCLAT To Supreme Court On Essar Steel Order, Says SBI Chairman

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Going public with his anguish and disappointment over secured creditors’ rights not being enforced, State Bank of India Chairman Rajnish Kumar said lenders will soon be moving the Supreme Court against the National Company Law Appellate Tribunal awarding higher payout to Essar Steel’s operational creditors and treating them on par with secured lenders.

While approving ArcelorMittal’s Rs 42,000-crore bid for the bankrupt flagship company of the Ruias-led Essar Group, the NCLAT had last Thursday given operational creditors equal status as secured lenders.

The appellate tribunal said secured creditors will get only 60.7 percent of their Rs 49,473 crore claims and the rest will go to operational creditors, treating them at par with the financial creditors.

Drawing from the statutes, including the provisions in the Companies Act, Kumar pointed out that there is a distinction between secured and operational creditors, and that the former have greater rights on an asset at par with the employees of the crippled company.

“If secured creditors are given the same treatment as operational creditors, then it is a huge disincentive for secured creditors and an incentive for operational creditors,” he told reporters after launching a book on the HDFC Bank.

He warned that with this ruling, bankers will be hesitant to use the Insolvency & Bankruptcy Code provisions for resolving bad asset till such a time that the principles of the law are clearly laid out and hoped that the Supreme Court will clarify the same once they challenge the Essar Steel order by the NCLAT.

Also read: NCLAT’s Essar Steel Judgment And The Spirit Of The Law 

Kumar suggested that the lack of distinction between secured and operational creditors only aggravates the situation around resolution, pointing out that already there is a lot of extra time taken for resolutions.

For instance, Essar Steel resolution crossed 600 days, while the IBC mandates only 380 days and is set to delay further as both the bankers and the Ruias are set to challenge the NCLAT order.

“The effectiveness of IBC option is quick resolution,” he said and exuded confidence that there will most likely be an amendment to the IBC law and asked everybody to be “patient” on the issue.

On inter-creditor agreements, which were to be signed by July 7—on completion of one-month period since the new non-performing asset recognition rules came into effect— he said if all banks have signed the agreement, then it means that at least prima facie they are convinced that these assets can be resolved.

“Banks have not signed inter-creditor pacts in all cases, and wherever it is felt that it cannot be resolved and despite Essar Steel order, if banks still have felt NCLT is a better option, they have taken such accounts to NCLTs,” Kumar said.

On the reports of a forensic audit finding Anil Ambani group companies indulging in frauds worth thousands of crores, Kumar limited himself to saying that the audits were ordered as part of a standard operating procedure for exposure of over Rs 50 crore.

Also read: Essar Steel Insolvency: NCLAT On Sharing Profit, Discrimination And Ruia’s Contention

He said once fraud has been detected, which becomes a criminal act, the law of the land will take its own course.

“Fraud is a crime against the state. Lenders have no choice. Crime is not committed against lenders, it is committed against the state. Anything that falls under the criminal law, the law will take its own course,” he said.

He maintained the same stance when asked about forensic audit on Dewan Housing Finance Corporation Ltd. as well but declined to speak on specific accounts.

Kumar said the SBI has a 100 percent provision on Bhushan Steel Ltd., where a fraud has been found, which is as per the Reserve Bank of India provisions.

The bank is yet to formulate a target for non-banking financial companies portfolio buys for this fiscal, he said, adding that let the assets come to the market first before deciding on any targets.

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