“Liquidation of EPC companies yields catastrophic outcomes”
India cannot achieve its infrastructure ambitions if hundreds of EPC companies languish in insolvency. A virtual session on ‘Distressed Debt in Indian Infrastructure Sector – Special focus on EPC’ hosted by the Federation of Indian Chambers of Commerce & Industry (FICCI) expressed concerns over increasing number of EPC companies going into insolvency.
Among the speakers, Annat Jain, founder & MD, Payard Investments, was particularly vocal about the problems being faced by EPC companies and rising stress in such companies.
“Insolvent EPC companies are unique, they own almost no assets of any tangible value, but have disproportionately large fund-based liabilities, itself an outcome of delayed payments from government clients. There is enough recent evidence to show that liquidation of EPC companies in India yields catastrophic outcomes,” he added.
He further added that it would be in the interest of all stakeholders to create fair, practical and innovative resolution plans which can rescue EPC companies from liquidation and simultaneously maximize recoveries for the company’s long-suffering creditors.
EPC companies are largely holding companies, which create Special Purpose Vehicles (SPVs) to complete contracts. So most of the value of the EPC companies lies with the SPV. But since SPV’s are a different corporate entity, the bidders of the EPC companies cannot get hold of assets lying with the SPVs. This creates a lot of difficulty in resolution of the CIRPs of such entities as the bidders show little or no interest in acquiring them.
Shailesh Pathak, CEO, L&T Infrastructure Development Projects Ltd, said that contract enforcement and dispute resolution need to be expedited for preventing stress in the EPC sector.
Speaking on the occasion, chairman of Insolvency and Bankruptcy Board of India (IBBI) Dr MS Sahoo, said that distilling the essence of Insolvency and Bankruptcy Code, and with support of insolvency Professionals and Committee of Creditors, a greater number of EPC companies can accomplish successful resolution under IBC. The law is an enabler for a rescue mechanism in the market economy.
“Stakeholders must be sensitised that value maximisation is not regardless of concerns of others in the ecosystem. There should not be undue fixation on a formula-based computation of liquidation value,” he added.
Meanwhile, the chief economic advisor to the government of India KV Subramanian while addressing the session blamed ‘crony lending’ for the mess the EPC companies are.
He said: “Crony lending is the elephant in the room that we have to acknowledge. Financial sector in India has to take responsibility that it is the ultimate arbiter of capital and ensure optimal capital allocation.”
Dr Subramanian also said that since the early 1990s the key problem of the Indian banking sector has been the quality of lending, especially of large loans.
“Banks need to ensure that capital allocation to the infrastructure sector is to credit worthy borrowers. Crony lending has been a problem in the banking system. The Economic Survey also highlighted that the banking sector’s problems originated from large loans that were not necessarily lent to the most credit worthy borrowers. This problem gets far more accentuated in the context of infrastructure. Financial institutions especially need to be working on this,” he added.
The CEA said that the country is now focusing on growth through infrastructure in a sustained manner, and that this is the time when the financial sector should take leadership role and assume the onerous responsibility for infrastructure growth. For the macro economy, financial sector plays a very critical role.
