Mains Paper 3: Economy | Mobilization of resources
From UPSC perspective, the following things are important:
Prelims level: IL&FS crisis
Mains level: Too big to fail institutions and their risk of failing
- The government has submitted the debt resolution plan for crisis-hit IL&FS to the NCLAT and also suggested the name of retired Supreme Court judge Justice D K Jain to supervise the entire process.
What is IL&FS Crisis?
- The IL&FS Ltd is an infrastructure finance company registered with the Reserve Bank of India as a ‘Systemically Important Non-Deposit Accepting Core Investment Company’, with over Rs.1,15,000 crore of assets and Rs. 91,000 crore of debt.
- IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on the due date—which means the company has run out of cash or it is facing a liquidity crunch.
- The company piled up too much debt to be paid back in the short-term while revenues from its assets is skewed towards the longer term.
The Resolution Plan
- The entire resolution process would be based on the principles enunciated in the Insolvency and Bankruptcy Code.
- Under the plan, the government has categorised IL&FS group companies into green, amber and red based on their respective financial positions.
- The corporate affairs ministry has fixed September 30, 2018 as the cut-off date for entertaining the claims submitted by the lenders.
- During the conduct of the resolution process, payments will be permitted only to maintain and preserve the going concern status of the companies of the IL&FS group.
Declaring a bidder
- Upon receipt of the recommendations, a successful bidder would be declared, who will deposit the earnest money.
- Upon declaration of the bidder, documentation of the sale will be completed and the forwarded to National Company Law Tribunal for the final approval.
- According to the affidavit filed before the NCLAT, the classification of the IL&FS group companies is “based on a 12-month cash flow based solvency test”.
- Companies falling in the green categories are the entities, which will continue to meet their payment obligation.
- While companies falling in the amber category are those who are not able to meet their obligations but can meet only operational payment obligations to senior secured financial creditors.
- Amber category entities “are permitted to make only payments necessary to maintain and preserve the going concern”.
- Companies falling in the red category are the entities which can not meet their payment obligations towards even senior secured financial creditors.
- These companies would be permitted to make payment necessary to maintain and preserve the going concern status.
Asset Monetization Plan
- The distribution of the sale proceeds would be in accordance with the waterfall mechanism specified under section 53 of the IBC.
- Under Section 53 of IBC, senior secured creditors loans are cleared first and any surplus that remains thereafter is given to unsecured or subordinated creditors and thereafter to the equity owners.
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