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News broke last week of an intriguing insolvency petition in India: under the new Insolvency and Bankruptcy Code, high-profile disputes are now commonplace, but what’s interesting here is it pits a Chinese policy bank against an Indian private-sector corporation.
On November 24, China Development Bank (CDB) formally filed an insolvency petition against Reliance Communications at the National Company Law Tribunal in Mumbai.
The company is believed to owe Rs130 billion ($2.01 billion) to Chinese lenders – not just CDB (the lion’s share at Rs114.6 billion/$1.78 billion) but China Eximbank and ICBC. That’s out of total debt understood to be above Rs450 billion ($6.97 billion).
A twist followed. On Thursday, Reliance Communications put out a statement saying that in a meeting of a committee of financial creditors, “a majority of Reliance Communications’ lenders, foreign and Indian, aggregating 31, decided to oppose China Development Bank’s insolvency petition”. The lenders appointed lawyers J Sagar Associates to oppose the petition, the statement said.
At the heart of it all is a restructuring plan for debt-laden Reliance Communications, which domestic lenders approved in principle in June – apparently without the Chinese lenders getting a say. The plan assumed a merger between Reliance’s wireless business and Aircel, and the sale of its mobile tower business to Brookfield Asset Management.
Both of those deals subsequently fell through, at which point it appears the Chinese lenders changed tack and started looking at insolvency. The code, which came into effect in 2016, is supposed to help banks get resolution of troubled assets far more quickly than in the past, allowing them to sort out difficult non-performing loan (NPL) positions and free up capital for growth.
It is understood a second restructuring plan, including a payment to the Chinese lenders covering about 5% to 10% of their debt, was then mooted but rejected by domestic lenders on November 23, triggering CDB’s action the next day.
Reliance Communications called the action “surprising”, “untimely” and “premature”, and clearly then lobbied its domestic lenders to stay at the table.
State Bank of India (SBI) is believed to be the principal institution fronting negotiations on the lending side. New SBI chairman Rajnish Kumar is hoping for a notable improvement in the bank’s difficult NPL position through both insolvencies and the reworking of distressed assets through restructuring.
It would seem that, for the moment, SBI and its peers prefer the latter route. Standard Chartered and HSBC are also believed to be lenders.
The view of the domestic banks might be influenced by the fact that the Reserve Bank of India requires lenders to provide 50% against secured loans to a company under insolvency proceedings, and 100% against unsecured loans. That’s a big hit to banks already trying to get their bad-loan ratios under control, meet regulatory minimums and keep lending.
In the background of it all is the fact that it puts two of the most powerful groups in Asia against one another, one from each superpower: India’s Reliance Group, and the Chinese state itself.
CDB is a policy lender 100% owned by the government and under the direct supervision of the State Council. Reliance Group is Anil Ambani’s half of the Reliance behemoth that split in half after the death of founder Dhirubhai Ambani in 2002; it includes Reliance Power, Reliance Communications, Reliance Infrastructure and Reliance Capital.
When two organizations of that size go against each other there can’t help but be political ripples, particularly given India’s opposition to China’s outward expansionism through the Belt and Road Initiative.