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How India's Bankruptcy Law Redo May Spur M&A Heyday
February, 07th 2018

Flexing newfound muscle they gained in a 2016 bankruptcy law, lenders in India are about to embark on a huge selloff of assets owned by companies that can’t repay their debts. The assets -- owned by steel, power, shipbuilding and construction companies -- have been drawing interest from potential buyers including ArcelorMittal, the world’s biggest steelmaker, and billionaire Anil Agarwal’s resources giant. This prospective wave of deal-making could push mergers and acquisitions in India beyond the previous annual record of $83 billion, set in 2017.

1. How much is at stake?
In this first round of deals, lenders are seeking to resolve about 40 of the largest delinquent accounts with total outstanding debt of more than 4 trillion rupees ($63 billion) within one year. For Prime Minister Narendra Modi, getting rid of the bad loans is crucial to reviving Asia’s third-largest economy and meeting his election pledge of adding jobs before his party seeks re-election in 2019. His government’s separate plan to inject 2.1 trillion rupees into state-owned banks should give the lenders sufficient capital to write off bad loans weighing down their balance sheets.

2. What does the bankruptcy law have to do with this?
The Insolvency and Bankruptcy Code, India’s first consolidated bankruptcy law, was passed in 2016, overwriting a patchwork of laws that in some cases dated back a century. One of Parliament’s primary aims was to give state banks a tool to resolve a growing problem of bad debts. Among other steps, the law created a new class of insolvency professionals to help steer the liquidation process.

3. What made India overhaul the bankruptcy law?
The inability to shut loss-making companies and collect on dues had locked up funds at banks and damped lending and investment. Indian insolvencies take longer to resolve than in any other major economy; only in Brazil do creditors typically recover less. Overall, India is No. 103 in the World Bank’s ranking of how nations handle insolvencies, just behind Nicaragua.

4. Why does India have so many bad debts?
Most of the companies that found themselves in a hole were hobbled by loans taken in 2007-08, which became hard to service as demand cooled and economic growth slowed this year to its weakest since Modi came to power in May 2014. Some borrowers found it even harder to repay when the government tightened various regulations, the courts canceled mining and gas-supply licenses, interest rates rose and fuel became harder to get. Making matters worse, there was long a belief among some Indian executives that they could walk away from their debts without facing consequences.

5. How does the insolvency process work?
A creditor to a company that has defaulted on its payments files an insolvency plea to the National Company Law Tribunal to recover its dues. The Tribunal hears arguments. If it is satisfied that the dues cannot be paid, it suspends the defaulting company’s board, determines the amount of claims to be recovered and appoints an independent insolvency resolution professional. That professional invites restructuring plans from bidders, who can submit their bids within 180 days, extendable by another 90 days. If the submitted plans are not approved by the majority of creditors, the Tribunal declares the company bankrupt and starts the process for liquidation of assets.

6. What’s up for sale?
The first list of 12 defaulters was released by the Reserve Bank of India in June, sales of which are in process.

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