Is it safe invest in defaulter companies referred to NCLT? - FinVizer

Is it safe invest in defaulter companies referred to NCLT?

What is NCLT?

The National Company Law Tribunal (NCLT) is a quasi-judicial body in India that adjudicates insolvency and winding up of Indian companies.The NCLT was established under the Companies Act 2013 and was constituted on 1 June 2016 by the Government of India.

What does NCLT do?

NCLT determines the fate of defaulted companies which are unable to fulfill their financial liabilities to any kind of operational or financial creditor. In simple terms, if a company owes you money and has defaulted on its obligation, then you can ask NCLT to close or wind up the company. Ofcourse, there are many complicated terms and conditions attached before you can file a request with NCLT, but in theory the power is available to any entity.

So which the are companies referred to NCLT?

The Reserve Bank of India, on June 13, 2017, had referred the first batch of 12 large defaulting companies to NCLT. The National Company Law Tribunal (NCLT) is the legal authority dealing with such debt resolution applications. The list of companies in the first batch are as below:

  1. Bhushan Steel Ltd: Bhushan Steel, the largest manufacturer of auto-grade steel in India, has a loan default of Rs 44,478 crore. The State Bank of India (SBI), the lead bank of the consortium of lenders, had moved the NCLT for recovery of its loan.
  2. Lanco Infratech Ltd: Lanco Infratech, once listed among fastest growing in the world, has a loan default of Rs 44,364 crore. IDBI has already initiated the process under the Insolvency and Bankruptcy Code against company’s loan defaults.
  3. Essar Steel Ltd: Essar Ltd, one of the biggest in India and abroad in the steel sector, has a loan default of Rs 37,284 crore.
  4. Bhushan Power & Steel Ltd: Bhushan Power and Steel, a sister company of Bhushan Steel, also has a loan default of Rs 37,248 crore. Bhushan Power and Steel was dragged to the NCLT by the Punjab National Bank.
  5. Alok Industries: Alok Industries, which is a Mumbai-based textile manufacturing company, has a loan default of Rs 22,075 crore. The NCLT, in July, admitted insolvency proceedings against the company filed by State Bank of India for recovery of its Rs 3,772 crore loan.
  6. Amtek Auto Ltd: Amtek Auto, one of the largest integrated component manufacturers in India, has a loan default of Rs 14,074 crore. SBI had moved for bankruptcy proceedings against the company.
  7. Monnet Ispat and Energy Ltd: Monnet Ispat and Energy, one of India’s steel producers have a loan default of Rs 12,115 crore. The bankruptcy proceeding against the company was approved by NCLT in July 2017.
  8. Electrosteel Steels Ltd: Electrosteel Steels is an Indian steel company based in Kolkata. The loan default by the company stands at Rs 10,273 crore. Consortium leader SBI had initiated insolvency proceedings, which was admitted by NCLT.
  9. Era Infra Engineering Ltd: Era Infra Engineering has a loan default of Rs 10,065 Crore. Union bank had moved the NCLT against the company.
  10. Jaypee Infratech Ltd: Jaypee Infratech is a subsidiary of conglomerate Jaypee Group founded by Jaiprakash Gaur. It has a loan default of Rs 9,635 crore. In August 2017, NCLT had admitted insolvency petition filed by IDBI bank.
  11. ABG Shipyard Ltd: ABG Shipyard, an Ahmedabad-based shipbuilding company, has a loan default of Rs 6,953 crore.
  12. Jyoti Structures Ltd: Jyoti Structures, a power transmission and distribution company, has a loan default of Rs 5,165 crore. The petition for insolvency was filed by its lead lender SBI.

In the second batch many more companies have also been referred to NCLT for debt resolution.

If there any chance for turnaround in these default companies? Is it safe to invest in NCLT companies?

Some of the defaulter companies have attracted significant buyer interest. This has happened mainly in the steel sector. Since then quite of them have seen their share prices increase significantly, attracting a few investors.

At FinVizer, we believe that it is very risky to invest in these bankrupt companies with the hope of a turnaround.
The legal, regulatory process in India is very complicated. Nobody knows what the ultimate outcome may be. Chances are many companies in the list will shut down.

Hence we suggest that only sophisticated investors with very high risk appetite and strong financial analysis skills should even look these companies. Full loss of equity capital is the most probable outcome in most of these cases.

It is best if a common man stays away from such risky bets, as there is a clear danger that one may lose all the money invested.

For more details, contact FinVizer.com and our financial advisors will guide you with constructing an equity portfolio suited to your needs.

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