Two scheduled commercial banks have moved the National Company Law Tribunal (NCLT) seeking to invoke insolvency proceedings against McLeod Russel Ltd — India’s largest bulk tea producer — amid a growing buzz that state-backed National Asset Reconstruction Co Ltd (NARCL) is interested in taking over the stressed loans.

HDFC Bank, one of the top lenders to the beleaguered planter, and Indian Bank, which acquired Calcutta-based Allahabad Bank, are the latest to file cases against McLeod.

HDFC Bank, the private sector bank, is understood to have a loan exposure of about ₹250 crore in MRL which has a debt of around ₹1,800 crore (principal). In comparison, Indian Bank has an exposure of about ₹29 crore to McLeod.

Earlier, State Bank of India and IndusInd Bank had initiated bankruptcy proceedings against McLeod Russel.

HDFC’s case against MRL was registered earlier this month and the matter was first listed on July 12. The court is going to hear the matter again in August. Indian Bank’s case was registered on Tuesday and the matter has yet to be listed for hearing.

It takes months — sometimes years — to get a bankruptcy case admitted before the NCLT, let alone reach a successful resolution. But the registration of a case exacerbates the pressure on the promoter group to strike a deal before it is too late.

In the McLeod Russel case, the entry of NARCL into the equation may change the scenario.

NARCL, which was set up with a strategic initiative to clean up legacy-stressed assets with an exposure of ₹500 crore or above in the Indian banking system, is understood to have held talks with banks after expressing interest in taking over these stressed loans. The question is whether the banks are ready to accept what NARCL is prepared to offer.

In FY23, Yes Bank, which had an exposure of close to ₹400 crore to McLeod, assigned the debt to J.C. Flowers Asset Reconstruction Pvt Ltd. However, some of the public sector banks, which are the sponsors of NARCL, are likely to be more comfortable in dealing with a public sector ARC.

The move by HDFC to initiate corporate insolvency resolution process (CIRP) under the Insolvency & Bankruptcy Code (IBC), 2016 also comes at a time the company, at the request of the lenders, submitted a fresh resolution plan in January 2024.

Simultaneously, McLeod submitted reports on the company’s valuation carried out by two independent valuers appointed by the lenders.

During the first quarter results, the company said the lenders had started discussions among themselves. In the past, there have been multiple attempts to rescue McLeod, which produced about 41 million kg of tea in FY23, under a resolution process governed by Reserve Bank of India’s guidelines but without success.

In 2023, McLeod had offered a one-time settlement (OTS) proposal to the bank consortium, offering to settle debts for ₹1,030 crore, with the backing of Calcutta-based electrode paste maker Carbon Resources Pvt Ltd which was keen to acquire at least half of McLeod’s gardens in Assam. However, the deal fell through as banks could not agree on the terms.

Given that the tea industry went through a rough patch in FY24 because of low commodity prices, a new settlement may be struck that could be lower than the OTS offer. If NARCL succeeds in taking over loans from banks, it will not resolve the self-inflicted debt woes of McLeod. But it may offer a better chance to thrash out a resolution as the number of debtors will come down, resulting in faster decision-making.

The Khaitan family, promoters of McLeod Russel, has faced down the threat from a CIRP process in the past.

At a time when the resolution talks dragged on, Techno Electric & Engineering Co Ltd’s CIRP application was accepted by court, triggering a crisis. McLeod’s promoters managed to come to a settlement with the company and took the tea planter out of insolvency.

Later, a case pursued by IL&FS Infrastructure Debt Fund was also admitted and the Khaitans again managed to strike a deal to keep McLeod out of the CIRP ambit.

It remains to be seen whether the cases filed by the commercial banks will
get admitted by the tribunal or whether a resolution will be reached before that happens.