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Wednesday, 12th October
Le Méridien, New Delhi, India

Managing Stressed Assets: Key for Attracting Infrastructure Capital?

September 09, 2021

Infrastructure sector is one of the most capital-intensive sectors, having a longer life span and payback period, which in turn necessitates long-term financing. On account of various economic factors, including the global pandemic, stress in the Infrastructure sector has multiplied, which in turn has led the creditors to evaluate various options through which the stressed asset can be resolved.

In this background, a Meeting was convened by the GRI infra Club to understand, from different industry experts, the most efficient ways to resolve the stress. 


The infrastructure sector tends to be very heavily regulated and highly dependent upon regulatory approvals and support, such as license or concession from a government authority. This raises various concerns at two stages, i.e. (a) once the company is admitted into and during insolvency resolution process; and (b) once a resolution plan is approved by the adjudicating authority under IBC. 

To address the first issue, IBC was amended in 2019, prohibiting suspension or termination of a licence, permit, registration, concession or a similar grant or right on the ground of insolvency, by a Government authority, during moratorium period. This prohibition is subject to the condition that there is no payment default in respect of current dues during the corporate insolvency resolution process arising for the use or continuation of the license or a similar grant or right. While the statute provides for prohibition on termination of approvals, there is no specific prohibition or restriction on termination of the contracts. In this regard, recently the Supreme Court in Gujarat Urja Vikas Nigam Limited v. Mr. Amit Gupta & Ors. (GUVNL Judgment) set aside termination of power purchase agreement (PPA) by the appellant, which was terminated solely on the ground of initiation of insolvency proceedings under IBC. In the absence of a statutory protection, the court took into account the centrality of the PPA to the business of the corporate debtor, its contribution to the revenue streams and that PPA itself prevented the corporate debtor from supplying electricity to third parties. As a consequence, and in the context of facts specific to this case, the court was of the view that termination of the PPA would sound the death knell of the corporate debtor, which was clearly contrary to the purpose of the IBC and would come in the way of the requirement to maintain the corporate debtor as a going concern during the corporate insolvency resolution process. These two developments are very significant for the resolution of stressed assets in the infrastructure sector under IBC. 

In relation to the second issue, it is important to note that the dues of the Government authorities (such as tax authorities, concessioning authorities, etc.) are classified as operational creditors under IBC. In case of resolution, the operational creditors are required to be paid higher of (i) the amount to be paid to such creditors in the event of a liquidation of the corporate debtor; or (ii) the amount that would have been paid to such creditors, if the amount to be distributed under the resolution plan had been distributed in accordance with the order of priority in case of liquidation. Upon payment of the said minimum amount (which in most of the cases is NIL), the balance debt  is extinguished under a resolution plan. While the Supreme Court has time and again upheld this and the principle of fresh slate start for a corporate debtor, from a practical perspective, there have been instances where Government authorities have been reluctant to accept such extinguishment. For instance, there are situations where a distribution company refuses to restore electricity unless the outstanding dues prior to the commencement of the insolvency proceedings are paid in full, irrespective of what the resolution plan says. Further, in such a situation, getting approvals for implementation of the resolution plan, whether it is change of concessionaire, change in control or change in ownership, becomes a critical issue. 

From a practical perspective, another challenge pertains to a situation where the holding company undergoes insolvency when the critical asset is housed in the special purpose vehicle. It is a common practice for companies to house their infrastructure assets in a special purpose vehicle, pursuant to a regulatory or contractual requirement or for independent operation. In such situations, once the insolvency proceedings are initiated, the promoter involvement in the distressed company is minimal, which in turn makes it difficult for the potential resolution applicants (if proper support in not provided by insolvency professionals), to obtain clarity from an operational perspective in order to ensure resolution on a going concern basis.

The above are some key issues which are specific to the infrastructure sector and have come in the way of resolution of infrastructure companies. These issues necessitate policy intervention and sensitization of the Government authorities for them to be more accepting towards the basic principles of insolvency law and to act as a facilitator in the resolution process.     


Post 2016, resolution under IBC is the most preferred option for restructuring of stressed assets across all sectors, including infrastructure sector. However, looking at the implementation of the Code as it has evolved in the past few years, it can be seen that there cannot be a uniform approach for resolution and the resolution process for each corporate entity should be evaluated on a case-by-case basis. For instance, IBC resolution has proved effective in the resolution of entities involved in the steel sector (such as in the case of Essar Steel and Electrosteel). Segments such as engineering, procurement and construction (EPC), may not be best resolved through IBC resolution given that there is a collapse risk in EPC business, which for instance, a power asset (which has an underlying power purchase agreement) or a road asset (which has an underlying concession agreement) is not exposed. The GUVNL Judgment gives some sheltering to binary risk (being risk of termination of a power purchase agreement or concession agreement) which a lot of investors are wary about, however, the same may not come as a rescue for other corporate entities where the intrinsic enterprise value of the corporate debtor is eroded on account of protracted delays and in some cases can also result in liquidation. 

Accordingly, certain infrastructure companies (such as those engaged in EPC as mentioned above) should be preferably resolved through pre-IBC restructuring instead of going for formal insolvency under IBC, with IBC being the last resort and not the first option. The lenders have an option to restructure their debt under out-of-court schemes specified by the Reserve Bank of India (RBI). Earlier, with the overall failure of the RBI led out-of-court debt restructuring schemes (like the Corporate Debt Restructuring Scheme, Strategic Debt Restructuring Scheme), RBI had repealed the multiple debt restructuring schemes, and introduced a comprehensive stressed asset resolution framework vide its circular issued on 7 June 2019 (as amended from time to time) (Stressed Asset Directions). The Stressed Asset Directions provides a framework for the collective resolution of stress by certain categories of lenders (banks, financial institutions and NBFCs), which also preserves judicial bandwidth, permitting a consensual solution, failing which a reference may be made under IBC. The Stressed Asset Directions have been used in various successful resolutions since their introduction and have also played a pivotal role in developing an environment of financial discipline in dealing with stressed assets, allowing eligible promoters to come up with consensual resolution strategy during the review period, which is arguably more cost-effective and less disruptive to the organization and the corporation. 

In addition to the above option, there are other avenues for debt recovery. In particular, proceedings for the recovery of debt and enforcement of security by Indian lenders can be initiated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI), the Recovery of Debt due to Banks and Financial Institutions Act 1993 (Debt Recovery Act) or proceedings before civil courts under the Code of Civil Procedure 1908. The creditor’s choice of procedure may depend on whether the creditor is an Indian or a foreign creditor and whether the creditor is a secured creditor.  From the perspective of foreign lenders, debt recovery tools under SARFAESI and DRT are not available and therefore, they may instead prefer resolution under IBC. This also gives rise to inter-creditor issues that need to be ascertained. 

The introduction of a pre-packaged insolvency resolution process under IBC, which has been currently introduced for micro, small and medium enterprises is also a welcome step for evolution of pre-IBC framework for resolution of stressed assets. Operationalization and effective implementation of pre-pack framework, as currently envisaged, may form the basis for larger companies (including infrastructure sector) and once introduced, can be gainfully employed to achieve cost effective resolutions in a time-bound court sanctioned process. Once introduced for the infrastructure sector, the framework could also be useful in reducing delays on account of litigation and may further help mitigate erosion of value of assets and further the objective of maximisation of value of assets of a corporate debtor.

Having said the above, IBC remains a key tool for resolution for the infrastructure sector, since in addition to introducing a time-bound resolution process, it has also brought about behavioural change, which fosters better possibility for a consensual restructuring. The inevitable consequence of payment default if remedial measures are not taken has prompted behavioural changes on the part of promoter/debtor who now try hard to prevent business failures and work towards consensual restructuring.

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