NEW COVERAGE: Majority Lenders of Dharani Sugars Favour Promoter-Backed INR 3.5B OTS Plan, Appoint SMC Capital Financial Advisor

A majority of lenders of Chennai-based Indian sugar company, Dharani Sugars & Chemicals Ltd., are in favour of a promoter-backed INR 3.5 billion ($46.77 million) one time settlement (OTS) plan and are in the process of providing an approval, according to two sources with direct knowledge of the matter. The lenders have mandated SMC Capital as the financial advisor, according to both sources and a third source with direct knowledge.

Dharani Sugars defaulted on total loans aggregating to INR 5.406 billion, including loans from Bank of India, on Sept. 30, 2021, according to an Oct. 4 BSE announcement.

The company, which has been undergoing a corporate insolvency resolution process (more below), had approached the consortium of lenders for a one-time settlement. Further, the company deposited INR 263.1 million under the terms of the OTS in an escrow account, according to Nov. 13 earnings statement for the quarter ended Sept. 30. The consortium of lenders had discussed the proposal on Nov. 2 and asked the company to deposit a further 15% of the INR 3.5 billion OTS amount on or before Nov. 30, the same statement shows.

Reorg’s coverage has previously flagged an emerging trend towards attempting to resolve debt restructurings outside the Insolvency and Bankruptcy Code (IBC), 2016 legislation, arguably diluting the purpose of India’s bankruptcy regime. The suspension of the IBC during the Covid-19 pandemic exacerbating the trend, and forcing lenders to favour pragmatism over regulatory procedure and arguably diluting the purpose of India’s bankruptcy regime, as reported.

In a recent and highly contentious case, lenders to Siva Industries Holdings Ltd. - which was undergoing a CIRP through the NCLT - filed an application to withdraw the CIRP, and accepted a one-time settlement (OTS) of their debt with the company’s promoter. However, the NCLT Chennai Bench subsequently ordered the liquidation of Siva Industries, rejecting a settlement proposal of INR 3.282 billion offered by the company’s promoters.

A Jan. 31 Economic Times report states that the National Company Law Appellate Tribunal upheld the NCLT Chennai Branch’s order to liquidate Siva Industries.

A Financial Express Feb. 8 report flags the case of Coastal Energen, wherein the NCLT Chennai Branch admitted the company into a CIRP, following the break-down of an out of court settlement via an INR 35 billion OTS proposal dated May 19, 2019.

NCLT Proceedings

On July 29, 2021, the National Company Law Tribunal (NCLT) admitted Bank of India’s petition to initiate the CIRP under the Insolvency and Bankruptcy Code, 2016 (IBC) against Dharani Sugars for defaulting on total liabilities of INR 572.5 million ($7.7 million), according to an order passed on the same day.

However, A. Sennimalai, the suspended Director of Dharani Sugars appealed in the National Company Law Appellate Tribunal (NCLAT) against the NCLT’s July 29, 2021 order and proposed to resolve the matter under section 12A of IBC, 2016, to withdraw the CIRP, according to a Dec. 7 NCLAT order. Section 12A states that the “Adjudicating Authority may allow the withdrawal of [an] application admitted under section 7 or section 9 or section 10, on an application made by the applicant with the approval of [90%] voting share of the committee of creditors, in such manner as may be prescribed.”

According to the July 29 order, the company stated that it had defaulted as the entire sugar industry has been under distress due to deregulation and sugar import and exports being largely controlled through tariff rates and duties. Dharani Sugars stated that the sugar industry in the southern Indian state of Tamil Nadu where it is headquartered was under particular stress due to “government policies, vagaries of monsoon and inadequate rainfall.”

According to a Times of India Jan. 24 report, the sugar industry in Tamil Nadu has been struggling since 2016 due to water scarcity. During the financial year ended in March. 31, 2017, the utilisation capacity of the sugar industry in Tamil Nadu slumped to 31% as compared to 99% in the financial year ended March. 31, 2012. Sugar production had fallen to 700,000 tonnes for the period ended March 31, 2017, from 2.38 million tonnes during the period ended March 31, 2012. During the period ended March 31, 2021, Tamil Nadu’s sugar industry produced 880,000 tonnes of sugar, while utilisation capacity stood at 38%.

According to the July 29 NCLT order, Dharani Sugar had offered an OTS plan multiple times to the bank consortium, and under the last revised OTS proposal dated Sept. 10, 2021, it offered to pay 40% of the outstanding debt as on date of the non-performing assets which was to be paid within three months from the date of approval of the OTS by the lenders. However, the consortium did not accept the Sept. 10, 2021 OTS proposed by the company.

According to the bankers, Dharani Sugars’ plea of being badly affected due to decline in sugar industry of Tamil Nadu, ‘cannot be made grounds to delay’ the initiation of the CIRP process or keep it in ‘abeyance’, the NCLt order shows.

The list of financial creditors as on Oct. 27, is given below:
 

Financials

Dharani Sugars reported a 55% year on year increase in its standalone revenue from operations for the quarter ended Sept. 30, 2021 to INR 102.25 million against INR 65.95 million in the previous year. While, the revenue for half fiscal year ended Sept. 30, grew 29.2% year on year to INR 396.72 million.

Loss before taxes for Dharani Sugars widened by 131% year-on-year for the quarter ended Sept. 30 to INR 136.28 million from INR 59.05 million in the previous year, due to a 187% year-on-year rise in cost of materials consumed and 66% year-on-year jump in other expenses.

Cash and cash equivalents as at Sept. 30, 2021 stood at INR 253.77 million increased by as against INR 58 million as at March. 31. The total debt of INR 5.585 billion for the period ended Sept. 30, as against INR 5.361 as at March. 31.

Dharani Sugars, interim resolution professional Rajendran Shanmugam and SMC Capital did not respond to multiple requests for comment.

The capital structure of Dharani Sugars is given below:
 

– Poonam Bansal, Dipika Lalwani