Bidders object to promoters joining race for stressed assets

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Bidders for firms facing insolvency are not taking well to the fact that existing promoters of such firms are getting an opportunity to join them in the bidding process for the stressed asset. They are objecting the promoters’ involvement after defaulting to loans.

A top official of a large corporate house, making a bid for a steel company, said the process of allowing promoters to bid was faulty. “What is the use of banks’ referring a company to the National Corporate Law Tribunal (NCLT), and then inviting bids from an existing promoter also? Banks could have gone for a corporate debt restructuring, thus saving time for everyone concerned,” said the official.

After the Reserve Bank of India (RBI) asked lenders to refer 12 stressed accounts to the NCLT in June this year, banks moved the NCLT and appointed resolution professionals as per the court’s order. The boards of these companies were suspended and bids were invited.
In the case of Essar Steel, its promoter, the Ruias have bid for the assets along with its Russian partner, VTB Bank, for its 10-million tonnes plant in Hazira, Gujarat. Tata Steel and ArcelorMittal have also bid for Essar assets. JSW Steel is bidding for both Bhushan Steel and Monnet Ispat’s assets. Bhushan Power and Steel has received bids from Vedanta and Tata Steel apart from five others. The other companies referred to the NCLT are Amtek Auto, Electrosteel Steels, Jaypee Infratech, Lanco, and Jyoti Structures.

Bidders are also objecting to the listing of companies on the stock exchanges after they have been referred to the NCLT. This, they said, gives an equity valuation that is actually zero, as the banks are taking huge haircuts on their debt.

Citing an example, they said in the US, once a company is referred to Chapter 11 of bankruptcy protection, its shares are suspended so that equity investors are not allowed to speculate in the stock.

“Investment bankers advising bidders have written to the Sebi (Securities and Exchange Board of India) so that the stocks of such companies can be suspended on the exchanges,” said the official. Some of these stocks have lost value since June after the RBI first announced referring companies to the NCLT.

The new investor should have the right to list or not to list as per their restructuring plan. The fate of quasi equity like preference shares and other instruments should also be made clear, he added.

When contacted, one of the existing promoters said they are free to bid for their company as per the Insolvency and Bankruptcy Code (IBC). Besides, he said, the existing promoters are allowed to bid in other countries also. “Many times, a company fails to repay loans due to external factors. It can be due to lack of clearances from the environment ministry or regulators, terror attacks or dumping of products by other countries, as happened in the case of steel. The company making the best offer should win the race,” he said, asking not to be named.

The bidders would take a final decision on the bid after taking into account the haircut to be taken by the bank.

The RBI had referred 12 companies to the NCLT for restructuring under the IBC. This was after banks refused to clear any restructuring files following the arrest of IDBI Bank officials in January for a loan given by the bank to Kingfisher Airlines a few years ago. With no new loan restructuring cleared by the banks, many companies failed to repay loans and are now facing the bankruptcy proceedings.