Insolvency Case Study – Anrak Aluminum Ltd.

In this series, we take a management perspective on the Insolvency Cases.

The Insolvency Process has several aspects to it and like the proverbial elephant the stakeholders are still struggling to understand the inner dynamics of the process. Like any other process, this too can be evaluated in terms of variance from the defined timelines (180 days) or on the parameter of the quality of the process output, in terms of the haircut suffered by the creditors.

As such, the Insolvency Code is a piece of legislation, but in its application, it transcends the legal and tends to take socio-economic colors with huge strategic shades. Each case that is filed in the judicial forums, the way the creditors formulate their strategies, the debtors response, the judicial evaluation of each case, everything needs to be seen through laterally, from a strategic management perspective to understand how corporates get into trouble and thereafter need to crawl out of the hole.

Some of corporates like Anrak Aluminum are private entities and as such not much information is available, while most, like Alok Industries, ABG Shipyard etc… are public entities and everything that affects them is reported to the Stock Exchanges under the Listing Obligations and Disclosure Requirements.

This compilation looks at some of the important cases that have been dealt with under the Insolvency and Bankruptcy Code, not so much in detail, as that may require a book in itself for each case, but still puts it under the strategic managerial microscope.

We hope these learning would help all the stakeholders involved in the Insolvency Process. Further the learning would be continuous as existing cases would move towards closure and new cases would come up.

Anrak is a very interesting case, as it hit turbulence before it had commenced operations…and the roller coaster ride it suffered is worthy of a Tollywood movie.

On 31st August 2017, the NCLT Hyderabad bench gave a landmark judgment in the CIRP application (#127/10/HDB/2017) filed u/s 10 of the Code, by #Anrak Aluminum Ltd, when it rejected the application on the grounds of;

“larger interest of various stakeholders and in the interest of the nation”.

In itself, where law is supposed to work within the constraints of the written word of the legislative output, with reason sans passion, it was not easy to decipher the #NCLT Order.

The Hon Bench relied on Section 10 (4) (b) of the Code, which states, “reject the application, if it is incomplete”. 

The reason the Bench found the #CIRP application incomplete was,

“the parties were given opportunities to rectify the defects in the application i.e. directions/suggestions of the Bench, to produce any documents to prove that they have taken up/pursuing with the State Govt/APMDC in the matter of revoking the cancellation of the Bauxite Supply Agreement with the State Govt/APMDC/other alternatives…”

What unfolded on that August day in the Bandlaguda Nagole suburb of Hyderabad, had begun over a decade back in March of 2007, when an ambitious project was incorporated in the form of AnRAK Aluminium Ltd.

For a long time, the ownership of the venture itself was shrouded in secrecy. #Penna Group, as a group owned 70% of the stake while the rest 30% went into the #RAK Group of UAE.  The Board is predominantly from the Reddy clan. Rumors floated thick and fast in #Andhra.

The Project Cost was estimated to be Rs 4,608 cr, which was appraised for a 65% leveraging by a Consortium of 23 banks led by SBI.  The Company obtained a Special SEZ License from the Ministry of Commerce of GOI as a X’Mas present on 24^th Dec 2008. Agreements were signed with APMDC for supply of the raw materials like bauxite from the mines in Rachepally.

The 1.5 MTPA Alumina refinery along with a 72×3 MW captive power plant was to be set up on 2300 acres of land to be acquired by AP Industrial Infrastructure Corporation at Rachapalli, near Vizag. Things moved smoothly, as the land acquisition was completed in spite of local resistance. This area is inhabitated by adivasi folks.

In a related development, in the aluminum industry, in Feb 01, Govt of India had divested 51% stake in Balco, which was taken up by Sterlite, owned by Vedanta Resources PLC. Somewhere around in Dec 2015, the board of #Vedanta Resources plc, approved plans of setting up a 0.5 million tonne per annum greenfield aluminum smelter project along with 1,215 MW captive thermal power plant in Jharsuguda, Orissa, for a total investment of $2.1 billion.

Orissa appeared to be the favorite investment destination around that time period, with projects like the 12 Billion USD steel plant by POSCO and 3.6 billion USD alumina refinery by Dubai Aluminum Co.

Meanwhile by 2013, the ANRAK project was completed albeit with some cost overruns. But more or less things had run smoothly. The political scene was also very stable and favorable. When the Company was incorporated, YS Reddy was the Chief Minister of Andhra Pradesh. In 2009, K Rossaiah became the CM for a year or so, before another Reddy, N. Kiran Kumar Reddy took charge. All the three Chief Ministers were from the INC party.

The Company AnRak Aluminum Ltd too was privately controlled by Reddy family.

Things changed dramatically after the State was bifurcated and a new state Telangana was carved out of Andhra Pradesh. The Assembly elections saw Chandra Babu Naidu come as CM of Andhra Pradesh in June 2014. The company site of Rachapally now fell in the state controlled by the TDP leader.

Everything changed.

Union Tribal Welfare Minister and Visakhapatnam MP Kishore Chandra Deo opposed the project and asked the AP governor to cancel the mining leases. Similarly, Union Rural Development Minister Jairam Ramesh voiced concern. The CPI and CPI(M) along with many non-governmental organisations (NGOs) and other groups protested against the unpopular bauxite mining part of the project.

On 21.11.2016, the APMDC cancelled the Bauxite supply agreement that it had signed with ANRAK.

Thus began a new chapter in the story of Anrak. Penna Group too was investigated by various agencies for a range of indiscretions. Things had turned noir.

The business viability of the Project dimmed as the basis for the project was the close and easy availability of alumina ore.  Private mining is prohibited in the tribal areas of Andhra and with APMDC refusing to play ball, there was limited scope. Getting the raw material from other states like Gujarat and Orissa was attempted, but it was a futile economically inferior strategy.

The next setback came even after the Hyderabad HC granted a stay and still APMDC refused to honor its part of the Agreement.

And then began the banking game.

It had become an NPA account long before the project could even be completed. On 24th Dec 2016, the account was restructured and the Consortium invoked the potent Sec 13 (2) of #SARFESAI.

SARFESAI Sec 13 (2),

“where any borrower, who is under a liability to a secured creditor under a security arrangement makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights u/s 4”,

this in turn is even sharper,

“(a) take possession of the secured assets of the borrower including the right to transfer by way of lease. Assignment or sale for realizing the secured asset.”

It was just the beginning of the many twists that were set to unfold. The Insolvency Code had received the Presidential Assent on 28th May 2016 and had been notified in the Gazette on the same day, yet more than seven months later, the Consortium still preferred the SARFESAI as an effective tool for salvaging their investments.

The SARFESAI was the tool of choice for the bankers, for it effectively skips the Courts, as long as the banker is procedurally right. Now the negotiations began on a serious note as the Management too realized the futility, for it was fighting the war on multiple fronts and nothing happened. In the meanwhile the NPA pressure was on the banks and AnRak happened to be one of the large NPA accounts that had appeared on the RBI radar.

Subsequent to the SARFESAI notice of Dec 24th, the Company made a One Time Settlement Offer to the banks for Rs 1,100 cr on 7th March 2017.

It makes a lot more sense for the bankers to settle the issue with the Company itself, instead of taking possession of the secured assets and then go about finding a buyer for those assets, which in the meanwhile would be languishing out there in the open exposed to the elements. This was particularly so in the instant case, for no banker can take a Smelter plant to its bank premises or warehouse.

So the hard nosed negotiations began between the Consortium led by SBI and the Company. As of 31.03.2017, the figures were large, although not as large as some other defaulters on RBI radar, but still large enough to cause concern on Mint Street.

Rs 5,712 cr had been expended on the Project of which 3,461 was funded by the Consortium, out of which 1,334 cr had been already paid back, leaving an outstanding debt of 2,130 cr.

For a banker, who has to take a decision, there are two critical guiding factors; fear in the form of Vigilance questions if she concedes too much and Greed in the form of Pension/Promotion depending on the ambition levels in the banker. The negotiations did not make much progress.

In the meanwhile the summer of 2017 experienced the heat being turned on the Mint Street.

About a month later, the Internal Advisory Committee (IAC) an RBI Panel comprising of the independent members of RBI Board held its first meeting on 12th June 2017. The IAC agreed to focus on large stressed accounts at this stage and accordingly took up for consideration the accounts which were classified partly or wholly as non-performing from among the top 500 exposures in the banking system.

The IAC recommended for Insolvency and Bankruptcy Code reference all accounts with fund and non-fund based outstanding amounts of over Rs 5,000 cr with 60% or more classified as non-performing by banks as on March end 2016.

On this objective criteria, the twelve major defaulters, or the Dirty Dozen, were identified, that cumulatively aggregated to over twenty five percent of the GNPAs in the banking system.

ANRAK did not meet the criteria. However, RBI was after the banks to take action, not limited to the Dirty Dozen.

A week later on 19th June, 2017, lenders met to formulate a joint plan to initiate action against the Dirty Dozen in terms of filing CIRP with NCLT. Simultaneously another meeting in the PMO, conducted by Prime Minister’s additional secretary PK Mishra, in which senior officials of the Ministry of Finance and Ministry of Corporate Affairs participated, took stock of the NPA issue.

The heat was on.

The Consortium conducted another meeting on 22nd Jun 2017 and safely decided to wind up the Company, albeit this time through the Insolvency Code route. Not just that instead of the financial creditors filing a CIRP u/s 7, the Company was asked to file a CIRP u/s 10. Accordingly, Anrak Aluminum Ltd filed a CIRP in the NCLT Hyderabad bench on 7th Jul 2017.

On 31st August 2017, the NCLT gave another twist to the story, as it rejected the application on the grounds of “larger interest of various stakeholders and in the interest of the nation”, as we saw at the beginning of the article.

However besides looking at exploring avenues to make the Project viable in terms of exploring alternate sourcing options, the bankers stayed focused on salvaging their outstanding amounts. In a meeting on 8th Sep, the Company increased the One Time Settlement Offer to Rs 1250 cr and then on 25th Oct further to Rs 1275 cr, which was accepted by all the lenders, except for one.

Meanwhile pressure was building up on Mint Street and RBI shot another directive on 27th Dec 2017, directing SBI to file for Insolvency. This time, the CIRP was filed u/s 7 by SBI itself, as the Company was not ready to go down under this time.

This time the Company wanted to stand up and fight back as it had by now worked out alternate sourcing options. There was a chance of survival. In fact, the Company approached the Hyderabad High Court to stay the NCLT petition filed by SBI.

Interestingly enough, the HC admitted the WP of the Company, which among other things requested the Court,

“to declare the Reserve Bank of India’s August 28th directive involving a specific set of large corporate borrowers, including Anrak and the consequent action of State Bank of India, as illegal, arbitrary and violative of Article 14 of the Constitution of India.”

The Hyderabad HC in March 2018 stayed proceedings against Anrak at the NCLT on an insolvency petition filed by SBI.

This was inspite of clear precedents set,

 “the pendency of winding up petition cannot be a bar under the Code for initiating CIRP, unless the winding up order has been passed by the Hon’ble HC and Liquidator has been appointed.”

so had ordered NCLT Chennai in CA/1/IB/2017, on 21.04.2017.

The Chennai High Court, which was involved, had overruled the NCLT Chennai order. The matter had gone to NCLAT, which had issued an order on 19th May, 2017,

“it is a fact that the Hon’ble HC of Madras had stayed the order of NCLT Chennai Bench  passed in CA/1/IB/2017 of 21.04.17. However, the provisions of the IBC will prevail over all other laws in force including the CA 56.”

But the main ground for the WP filed by Anrak was,

 “It is submitted by the learned senior counsel that having made the petitioner herein to pay a sum of Rs 1.25 billion under ‘One Time Settlement’ Scheme, there is no justification on the part of respondent number SBI to initiate proceedings before the National Company Law Tribunal, Hyderabad bench.”

Not just that Anrak also challenged the jurisdiction and authority of the RBI and submitted to the High Court that the provisions of Section 35-1 of the Banking Regulation Act only empowered the central bank to issue general directions. The company said such a power would not extend to taking up specific cases and directing a bank in specific loan accounts.

RBI has submitted its position in the Hyderabad HC in Jul 2018, to vacate the stay, so that CIRP proceedings can be initiated.

As things stand on 25th July, the Company is busy working out its alternate suppliers. Gujrat, Orissa, LS Rao (VP – Works) was quoted in The Hindu, “We also want to source raw material from Australia, Guinea and Indonesia to ensure continuous production at our refinery.”

The macro picture however is even more intriguing. In the big picture, leaving aside the numbers, the demand for Aluminum is set to explode, while the supply is constrained by capacity to just Vedanta, Hindalco and Nalco. Demand shortfall is set to be met through imports. Domestic capacity is constrained by the same problem of raw material (ore) availability.

The experience of Vedanta in Orissa and Anrak in AP has taught lessons that can discourage any greenfield venture, or even expansion of existing. Given the price cycle of aluminum, importing the ore might still make economic sense for AnRak.

There is a subtle difference in terms of the obligations of NCLT vis a vis a CIRP filed by a FC and a CD.

Section 7 which deals with CIRP filed by FC, states, u/s sub section 5(a), “a default has occurred”.

Now a lot of water has flowed down the Godavari since the first time NCLT had rejected the CIRP filed by the CD. There has been a One Time Settlement and the Corporate has honored its part of the OTS Agreement. So defining the default would not be easy for SBI.

While Section 10, which deals with CIRP filed by a CD states, u/s subsection (4) states,

The AA shall, within a period of 14 days of the receipt of application, by an order (a) admit the application if it is complete, or (b) reject the application if it is incomplete.

On 31st August, 2017, the NCLT Hyderabad bench had rejected the CIRP application filed by the CD on the basis of Sect 10 (4) (b).

This time, possibly, assuming that RBI is able to convince the HC to vacate the stay, it is likely that the NCLT may reject the application on the basis of Sec 10 (1) itself, “where a corporate debtor has committed a default”.

Furthermore, the company is in a much stronger position to honor its further commitments in resolving the unresolved debts post the One Time Settlement Agreement that it had signed with the Consortium in the beginning of 2018. If one has to take a bet, then may be the NCLT may give a second chance to the Company.

So may be, Anrak might just get a fresh lease of life as the Bankers may also see the benefit of salvaging their provisions and thereby benefit from the writebacks in the coming years. And SBI in particular may be grateful for that NCLT bench judgement that had rejected the CIRP filed by Anrak u/s 10 of the Code.