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Foreign creditors feel the pinch

Author: Kala Rao

When four foreign creditors refused to go along with a debt-recast plan for Arvind Mills, a leading clothing manufacturer that has hit hard times, it created something of a sensation in Indian financial circles. Then one of the creditors, Commerzbank, filed a criminal suit against top officials of the company and against ICICI, one of the biggest Indian banks and Arvind Mills' principal creditor, and things began to look ugly. Now a new central bank directive laying out ground rules for restructuring corporate debt seemingly gives big creditors a boost, and has bankers whispering about infringement of creditors' rights.

The Reserve Bank of India's new rule stipulates that when lenders accounting for three-quarters of a borrower's secured debt agree to bail the debtor out, the minority creditors will be legally bound to go along with them. The rule is meant to discourage delays caused by lengthy litigation by individual creditors in cases where the borrower is solvent but faces a genuine liquidity problem caused by a business downturn. But, as the Arvind Mills case reveals, creditors can have widely differing views and concerns.

Arvind Mills' dissenting creditors - Commerzbank, Bank of Nova Scotia and Dai-Ichi Kangyo Bank - allege that assets mortgaged to lenders were sold to pay off the company's biggest secured creditor, ICICI, and other assets were diverted to subsidiaries.

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