It is not uncommon for a CEO to sue his ex company; happens all the time, particularly in the US of A. However, even in the US of A, it is rare to see an ex-CEO filing corporate insolvency of the company where he had built up over a decade.
The CIRP petition IB/9/HDB/2017 filed u/s 9 of the Code was decided on 21st Feb 2017 by the Hyderabad NCLT bench. It sought to put Lanco InfraTech Limited into Insolvency in accordance with the provisions of IBC 2016, appoint Interim Resolution Professional, award costs etc..
The petition was filed by KKV Naga Prasad who had worked for various group companies of Lanco InfraTech Ltd, from Jan 2003 till Jan 2014, in various roles, the last being CEO.
Almost three years after an amicable separation, he served the mandatory notice period also he realized that the Company owed him some money, as part of his Full & Final Settlement. So on the 2nd of Jan 2017, he sent a Demand Notice (as per Form 3 u/s 8 (1) of the Code) to his ex-employer, demanding Rs 1.22 cr plus interest.
The legal department of Lanco swung into action. It worked with the HR Department, got all the details and sent a crisp response to the Demand Notice,
“that the contents in the Demand Notice was nothing but a cohesive means to harass and agonise the Company, and pressurize it to give into the unjust demands by threatening insolvency of Company.”
And when the petition was filed, Lanco also added the killer HR punch, that it was actually the ex-CEO who owed Rs 3.81 lacs to the Company. Well the HR Departments always find a way out. T. Adi Babu, the CFO also would have been happy, for the Company was in dire need of monies.
The financials for the recent past quarter, i.e. quarter ending 31st Dec’16, were red but not rosy. The revenues had come at a meager Rs 238 cr, with a Net Loss of Rs 388 cr. It had been a long journey and the Company had seen some very rosy red days also.
Lanco Infratech is an EPC (engineering, procurement and construction) contractor and operator of power projects, mining assets, roads and real estate started in the 1960s by Naidu along with this two brothers.
The name of the Company in itself is derived from Lagadapati Amarappa Naidu who came from a business family and had deep political connections. The co founder, Lagadapati Rajagopal was a member of the 15th Lok Sabha representing Vijayawada.
Lanco grew at a tremendous pace in the early 1990s. The initial growth was driven by large contracts primarily in construction, most of which may have been facilitated by the political connections. Later, other infrastructure areas such as power generation, transportation were also added.
In Sep 2010, Forbes Asia listed Lanco sixth on its list of Companies to Watch in Asia. In 2011, the group became the largest private power provider in India. Lanco was one of the first IPP in India. 2011 marked 25th year of Lanco. The Annual Report of FY11 glowed with achievements.
The IPP had 9300 MW under operation & construction and another 7000 MW in various stages of development. It had ventured into solar power. It had acquired the Griffin mines and the Mahatami coal block in Chattisgarh was within grasp. It was exploring possibilities to build coal assets in Indonesia and Africa. It was involved in developing two major National Highway projects in Karnataka with a total length of 183 km on BOT basis and another 283 km toll road on NH91 in UP. The Port Project included the development of 3 MTPA fully mechanized captive coal jetty with associated coal handling facility at the New Mangalore port.
FY12 was probably the best year in the lifespan of the company as revenues crossed 10,000 cr, PAT touched 687 cr and Cash profit hit 1,378 cr. Networth hit a life time high of 4,705 cr.
As it happens with companies on fast track, interest cost spiraled up. This happened in the case of most of the companies that are being discussed, whether ABG, Alok, the story is boringly repetitive.
The o/s debt crossed 30,000 cr mark in FY12 and interest costs crossed the 1,000 cr mark.
We can’t be sure whether the Board smelled it or not, but the markets surely smelled trouble and the stock crashed.
Next year Lanco hit the ground hard. Interest costs crossed 2,000 cr mark and the company went into red with a loss of 1,082 cr in FY13. Cash profit slumped from 1,378 to 232 crores.
Even before the FY 13 Annual Report was published, news came that in June 2013, a contract for setting up two 300 MW power plants in Gujarat that it had won had to be cancelled when the company failed to put up the 10% guarantee required in the contract
By July 2013, the company had filed for debt restructuring, citing business slowdown. Bad news once again hit the stock markets, when in September it was revealed that the company had cut down its employees by nearly half.
In Dec’13, the Corporate Debt Restructuring package was approved by the CDR Empowered Group, among other terms, it would re-schedule the term loan and short term loans having moratorium period of 2 years from the cut-off date of April 1, 2013 and would be repayable in 30 quarterly installments starting from June 30, 2015.
Further a 2,500 Crores Priority Loan was sanctioned with a moratorium period of 2 years at an interest rate of 12.5% and repayable in 18 quarterly instalments starting from June 30, 2015.
As a part of the sanctioned Priority Loan, the Company received an amount of 1,678 cr out of the 2500 cr.
The CDR Package was delayed in getting the approval from the Lenders. So most of the Priority Loan sanctioned under CDR Package was used to address the interest dues of the Lenders. This further delayed the revival of EPC Operations.
The results of FY 14 were the worst in its lifetime. In a span of just two years, the net profit had fallen from 687 cr in FY12 to (2245) cr in FY14. Cash profit too fell from 1,378 cr to (743) cr.
The bankers converted a portion of their debts into equity. On December 29, 2014, 5.45 cr Equity Shares of Face Value of 1/- each and on June 23, 2015, 2.17 cr Equity Shares of Face Value of 1/- each were allotted at an Issue Price of 6.23 Per Equity Share (including 5.23 Per Equity Share towards Share Premium) to ICICI Bank Limited under the CDR Package approved for the Company.
The bankers were losing confidence as issues on corporate governance got credence.
In FY 16, Lanco approached the Consortium led by IDBI Bank with a proposal for Long Term Working Capital Loan of Rs 1500 cr to help bring the EPC operations to its full potential. It was approved at the Joint Lenders Forum.
However, as it happens the bane of corporate is the bureaucratic delays. The LTWCL sanction and release by the Lenders again got delayed and the restoration of the EPC Operations could not be fully achieved.
FY 16 saw a turn around, albeit minor, as the Company made profits at cash level and was almost in the black at the net level.
However, that turned out to be an aberration, as the nine month period ending Dec 2016, once again saw the Company slip into red on both net (666) and cash levels (596). Generally the CEO of the Company broadly knows the numbers immediately after the quarter is over, quite often even before the quarter is over.
As if the bad financial numbers were not bad enough for GV Babu, that on the 2nd of Jan 2017, the Managing Director, he also received a Demand Notice (as per Form 3 u/s8 (1) of the Code) demanding Rs 1.22 cr plus interest, from KKK Naga Prasad, Company’s ex-CEO, three years since he had parted ways with the Company.
The Demand Notice was issued as per Form 3 u/s 8 (1) of the Insolvency & Bankruptcy Code, indicating a possible initiation of Insolvency proceedings against the Company. It was not good news for the Board. The retaliation was sharp and exhaustive. The demand was disputed vide letter dated 11th Jan.
The Company contested the CIRP application filed by KKK Naga Prasad in the NCLT Hyderabad bench on various grounds.
It pointed out the dispute the Company had raised in the demand (u/s 8 (2) (a)) and that once a dispute is raised the AA has no jurisdiction, the matter should be referred to the civil courts.
Thirdly, since the Code came into effect wef from 28th May 2016 and the Demand pertains to prior period, again the NCLT has no jurisdiction. The long gap between the resignation of the ex-CEO and the raising of the demand notice was highlighted. Fourthly, the Full & Final Settlement submitted by the petitioner as evidence, was disowned by the Company.
On 21st Feb 2017, the NCLT Bench dismissed the CIRP application.
This was not the end of the tragedy for Lanco Infratech, but rather the beginning. Things were sliding down rapidly into a deep dangerous abyss. About two months later, it hit the iceberg.
The financials for the year ending March 2017 were even more disastrous. Interest costs spiraled to almost 3,000 cr and the net once again crossed 2,000 cr in red.
Sequentially also, against a loss of 388 cr in the previous quarter, the Company made a loss of 484 cr in the quarter ending March 2017. The cash loss too dipped from 351 to 504 cr. There was no end in sight to the problems.
Far away from the high rises of Hi-Tec City, things started to move ominously on the Mint Street. The summer of 2017 was particularly hot in Mumbai and to make it worse the bankers experienced the heat being turned on by the Regulator.
One after another banks were coming under the framework of Prompt Corrective Action. The RBI Governor was staring at a systemic risk to the banking sector and eventually to the entire economy. The PCA framework itself was pretty old, had been first issued in 2012. However the revised guidelines issued in April 2017, were sharp and hurt.
By mid 2017, PCA had been triggered in quite a few banks such as Central Bank of India, UCO Bank, Dena Bank, Bank of Maharashtra, Indian Overseas Bank and IDBI Bank.
The PCA is invoked when certain risk thresholds are breached. There are three risk thresholds which are based on certain levels of asset quality, profitability, capital and the like. The third such threshold, which is maximum tolerance limit, sets net NPA at over 12 per cent and negative return on assets for four consecutive years. PCA meant that these banks were to operate under severe restrictions which could be like banned from further lending.
While almost every SCB in the country had exposure to Lanco Group, IDBI had the maximum. The losses made by IDBI Bank more than matched the losses of Lanco. Irony comes in many forms.
However, RBI was not done with just declaring the PCA for banks like IDBI Bank; it had to push for stronger measure to help banks come out of the NPA quicksand which was threatening to take the entire sector down under.
IDBI Bank was probably the worst in terms of performance on all the three parameters. In a regulatory filing, IDBI Bank informed the stock exchange,
“RBI, vide their letter dated May 05, 2017, has initiated PCA for IDBI Bank in view of high NPA and negative RoA,”
RBI constituted the Internal Advisory Committee in ancient Indian traditions, to help it make decisions.
The following month, 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.
A week later, 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.
Clear instructions, without which bankers rarely work for the usual inbuilt fear of vigilance, were issued to initiate CIRP proceedings in the case of the Dozen, viz. Bhushan Steel Ltd, Bhushan Power, Essar Steel, Jaypee Infratech Ltd, Monnet Ispat, Jyoti Structures, Electrosteels, Amtek Auto, Era Infra Engineering Ltd, Alok Industries Ltd, ABG Shipyard Ltd and Lanco Infratech.
IDBI being the lead lender took the initiative in the case of Lanco, to which the banks had an aggregate exposure of over INR 40,000 cr. The Men in Suit met in June 2017, to chalk out the plan of action. The Undertaker was identified.
In the first week of July 2017, IDBI Bank filed CIRP u/s 7 in NCLT Hyderabad bench, as Lanco failed to make payments. As on June 15th 2017, there was an amount of Rs 234.96 cr which was due and payable. It was not paid.
So IDBI Bank, the petitioner sought to initiate Corporate Insolvency.
It was the second time in six months, the Company faced an insolvency proceeding and once again it fought for survival, although it did accept that there was a default.
The main defense was on the theme of the Company’s glorious past.
“Lanco Infratech is the flagship company of Lanco group. Lanco group is in the business of EPC, Power, Infra Development, Real Estate, and Natural Resources.. LITL with more than 25 years of experience is one of the largest private sector players in India in the field of power and infrastructure EPC and has experience in implementing large infrastructure projects in power, transmission, transportation and industrial sector through the EPC route. The Lanco group provides employment to more than 3400 employees and is involved in building large civil and urban infrastructure projects and thermal, hydro and solar projects of national importance.”
The Company also argued that,
“that the CIRP of LITL will not yield insolvency resolution and it would lead to liquidation only. The liquidation of the Company would not benefit its stakeholders including IDBI Bank itself.”
It went to the extent of issuing a subtle warning,
“…the creditors of Lanco would suffer substantial losses if standalone resolution of Lanco is taken. Lanco being a listed company with a public holding of approx 30% the impugned action of initiating insolvency would not affect only the promoter but also public at large.”
These arguments did not help the legal case, which was looked at dispassionately by the NCLT and admitted the CIRP filed u/s7 (5) and Rule 4 of the Code. The only concession it made was on the appointment of the IRP proposed by IDBI Bank. Instead of Mr Iyer it appointed Mr Sasan Godiawala, as Mr Iyer appeared to be busy having been appointed in some other high profile cases. Both came from the same firm.
NCLT admitted the CIRP on 7th August. The clock was set to stop ticking at the 180 day period on 3rd Feb 2018.
The IRP Savan Godiawala ((IP Reg No IBBI.IPA -001 /IP – P00239/2017-18/10468) must have joined office in Hyderabad on 8th August. Next day he sent out the first message.
It was a crisp communication that the Stock Exchanges received on 9th under the LODR, that the Board meeting of Lanco scheduled on 11th August was cancelled.
The next implication of CIRP initiation, was another communication,
“The powers of the Board are suspended and are being exercised by Mr. Savan Godiawala, Resolution Professional of the Company (”RP”). The RP currently is in the process of procuring the audited financial statements and obtaining requisite confirmations and representations for the same to be presented in the AGM.
The Registrar of Companies, Hyderabad has considered our application and granted an extension of 3 Months to hold its AGM, from September 30, 2017. In view of the above, the AGM of the Company will be held on or before December 31, 2017.”
When the Code was formulated on the basis of BLRC Recommendations in 2015, there was an intense debate in the public doman. Among other issues, there were two points that were debated intensely, first was the timelines, 180 days (plus 90). A uniform timeline across a wide spectrum of industries, irrespective of the scale of operations was questioned intensely.
The other point was the ability of an Insolvency Professional, who is to be paradropped behind battle lines in a battered company, to understand the business complexities and come up with a Resolution Plan within the stringent timelines.
However in practical terms, Lanco InfraTech was a test designed by the devil himself. It was a sprawling business, with interests in Power, Roads, Ports, Real Estate, spread across the country and a scale that required figures to be put in billions.
It was a challenge. When NCLT overruled the appointment of Mr Iyer, as IRP due to his preoccupations, the job was given to his colleague in Deloitte, Savan Godiawala. Mr Godiawala holds a first degree in Commerce followed by CA and has over two decades of experience in the areas of M&A, PE Debt Syndication and such stuff. Besides, he also lectures the bright brains at IIM Ahmedabad.
In a way, the challenge had found its match.
Addressing the AGM in Dec 2017, the Resolution Professional did his best to assure the concerned shareholders,
“the job of a Resolution Professional is to find out the total claims on the company, its payables, and receivables and also how to bring it to resolution. We are about four and half months into the resolution period and we are left with 45 days now. We have already prepared an Information Memorandum on the status of the firm and what could be the possible resolution.”
He added, a proper factual disclaimer,
“in the next three months, we will get an idea whether this company will survive or can be revived and a resolution can be achieved. If a resolution cannot be achieved, then it will go into liquidation.”
However, he too faced delays, as things moved slowly and he had to file an application with the NCLT for extension of time. The clock was reset to stop on 4th May, with the 90 day extension granted by NCLT in Jan 2018.
In the meanwhile, it was business as usual at the Company. The quarterly numbers released on 15th Feb 2018, showed the continuation of downslide. The Revenues stood at a mere 17.8 cr, compared to 238.5 cr in corresponding previous qtr, net slumped to (4261) from (3886).
The resolution process moved forward with some interest generated amongst some big players. Bidders included US asset management company Ingen Capital, energy firm Penn Energy, Odisha-based mining firm Thriveni Earthmovers, DivyaSree Developers from Bengaluru, Solarland China, Cube Highways backed by ISquared and Kalyani Developers, Bengaluru.
The Committee of Creditors considered these bids. They had earlier invited bids for individual assets, but extended the deadline to March 2018 after tepid response.
Given the vast spread of assets, it was unlikely to begin with, to find one player who would be interested in the entire basket. As such most bids that the Resolution Professional received were for specific assets and few offered a consolidated plan for the entire company.
Eventually, there was only one bid left on the table, submitted by Thriveni Earthmovers, a Tamil Nadu-based infra and mining firm, who had submitted a revised proposal on 1st May 2018, after the earlier proposal was found wanting by the CoC. In fact the Committee refused to examine the revised resolution plan, stating that it was not given sufficient time to look at the proposal.
The fears expressed by the counsel of Lanco while arguing against the IDBI Bank initiated CIRP in the NCLT Bench, that
“that the CIRP of LITL will not yield insolvency resolution and it would lead to liquidation only,”
appeared to be coming true.
On 3rd May, the Resolution Professional Savan Godiawala filed Liquidation Application in NCLT as no Resolution Plan had been approved by the CoC. And on 4th May, the clock stopped ticking as the 270th as the Sun set over the Lanco Hills.
On 25th May, Sasan Godiawala informed the Stock Exchanges that the NCLT had posted the CIRP hearing on 13th June 2018 and hence the RP had sought additional time from SEBI, for preparation and finalization of the FY 18 results. The board meeting scheduled on May 28, 2018 is being postponed and shall be re-convened on the basis of the outcome of the liquidation application filed on May 3 with the NCLT.
On 13th July 2018, in a significant variation from the time bound process, Judge Ratakonda Murali announced that he would exclude certain days from the expired 270-day period in order to grant additional time to the CoC to take a view on the modified resolution plan of Thriveni Earth Movers Ltd.
In between the NCLT was closed for vacations and for more than a month the liquidation petition filed and the fate of the company hung in balance.
“As a result, Application is allowed by excluding 16 days for the purpose of counting period of CIRP and thereby allowing the RP/CoC with immediate effect from today to complete the CIRP and further direct the resolution professional to place the revised resolution plan filed by TEPL before the CoC… it is directed to take appropriate decision on the revised plan within the period allowed. The resolution professional is to discharge his functions as usual during this period,”
Eventually if NCLT does order liquidation, Lanco will become the second company from the RBI List of Dirty Dozen to face that ignominy after Jyoti Structures. Of course the stakeholders have the option of challenging the order for any liquidation proceedings at the National Company Law Appellate Tribunal.
As per the recent reports, Promoter & Promoter Group holds 58.51%, while public holds rest. The stock trades below par. Wealth in billions has been washed away. Whether it is Resolution or Liquidation, the bankers would have to take a substantial haircut.
The lead banker, IDBI Bank, in the meanwhile ironically has gone down under. The wires of the NPA problem of India are indeed very complicated. A Resolution Plan for IDBI Bank itself is being implemented.
On 17th July, a few days after the latest NCLT hearing in the Lanco CIRP, IDBI Bank Board met to consider Life Insurance Corporation of India’s offer to buy 51% controlling stake in IDBI Bank.
In the third week of August, NCLT Hyderabad allowed a fresh twist. Vijaywada based Power Mech, turned out to be the dark horse, filed in an EOI on 23rd August. Lanco was headed into liquidation as the COC had rejected the Thriveni proposal twice. Now NCLT may insist on the CoC to consider the Power Mech Proposal.
However, may be the next time when NCLT sits on the CIRP IB 111 filed by IDBI Bank it might be informed about the fate of the petitioner itself. And by the time the fate of Lanco is actually decided the fate of IDBI Bank may be sealed.
It may cease to exist.
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