Lenders to Aircel call for bridging Sarfaesi, IBC gap

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Lenders to the Aircel Group, led by State Bank of India (SBI), have written to the Reserve Bank of India (RBI) seeking harmonization between India’s insolvency law and the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (Sarfaesi) Act, said two people, requesting anonymity.

After the central bank rejected the resolution plan for Aircel by UV Asset Reconstruction Co. under the Insolvency and Bankruptcy Code (IBC) in August, the lenders were left with 19,000 crore of unresolved loans. RBI is of the view that ARCs are supposed to buy debt and not equity under the Sarfaesi Act, which is the governing law for all ARCs in India, Mint had reported.

“In the letter, sent a few days ago, the lenders’ consortium has urged RBI for some clarification on the issue and requested for it to be resolved,” one of the persons mentioned above said, adding that the central bank has also held discussions with the government on this issue.

Under RBI guidelines in force since 2017, ARCs can hold more than 26% equity in a borrower after debt-to-equity conversion if they meet certain norms. UV ARC’s resolution plan said it would get a 76% stake in the company in the first five years, with financial creditors getting the rest. In June, the National Company Law Tribunal approved UV ARC’s bid of 6,630 crore for Aircel. Legal experts said some changes to the Sarfaesi Act could be a viable option, given that ARCs are emerging as resolution applicants in many IBC cases. “To make it easier for ARCs as resolution applicants, tweaking of provisions is required. The limited tweaking can be in the form of new guidelines permitting ARCs to take equity or allow them to bring in partners,” said Ashish Pyasi, associate partner, Dhir and Dhir Associates. As bringing in a partner is not always feasible, allowing them to take limited equity in the corporate debtor can be a middle path, said Pyasi.

The resolution plan for Aircel was subject to RBI’s approval, but very few people expected a rejection, said the second person mentioned above. “There were several lawyers working on the transaction for banks as well as UV ARC and the proposal was expected to sail through, considering that the tribunal had cleared it. However, RBI took a more holistic view of the matter and now all ARCs are in a fix over the resolution plans under IBC,” this person said.

The outcome of RBI’s deliberations with the government is eagerly awaited by lenders as well as ARCs.

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