Resale curbs likely in toxic asset auctions

The government is in discussions as to whether it should put in reasonable restrictions for a limited period of time on the successful bidder of a distressed asset so that it cannot transfer or sell the shares of the company back to its promoters or their related parties, holding companies, subsidiaries and associate companies.  

This, most experts say, is essential in order to plug any loopholes after a recent ordinance by the government has virtually ruled out promoters from bidding for their own distressed assets if these have become a non-performing asset for banks for more than one year. Questions have been raised as to whether promoters could use their international partners and banks as well as relatives to buy the assets and transfer them back to themselves in order to avoid the new rules.   

The promoters of Essar Steel, Bhushan Steel, Monnet Ispat, and Jaypee Infrastructure had shown an interest in bidding for their own companies. Most of them point out that this rule will substantially reduce valuation at which these companies will be sold. This is detrimental for banks that have extended the loans.  

Under the new ordinance, the government has added a whole list of entities that will not be allowed to bid. These include wilful defaulters and anyone who has his loan account with a bank classified as non-performing for one year or more and is unable to settle overdue amounts, including interest. It also includes the holding company, subsidiary or associate company or related party of the promoters of the distressed assets.

The Insolvency and Bankruptcy Code (IBC) defines a related party as someone who controls more than 20 per cent of the voting rights in the distressed company and  also directors in a public company with more than a 2 per cent stake. This has given rise to questions whether a company like ArcelorMittal, which has shown an interest in bidding for some of the distressed assets, will be eligible despite its credit-worthiness and also the fact that it has no management role in Uttam Galva, a company that is on the NPA list for over a year.  
 

The Securities and Exchange Board of India Act defines a promoter and a promoter group as anyone with more than 10 per cent equity and control over the running of the company. Sources say clarity on the definition the government wants to follow will limit or extend the definition of those who will not be allowed to bid.  

However, ArcelorMittal, the world’s largest steelmaker, has made a strong pitch as an eligible bidder for distressed assets currently going through insolvency resolution, and said: “We hold a non-controlling minority shareholding in Uttam Galva, have no representation on the board of directors, nor influence on management decisions. As such, we are not a promoter of Uttam Galva. Therefore, there is no objective reason for ArcelorMittal to be prevented from bidding for any steel asset under the restructuring process.”

The ordinance was necessitated as the government thinks by allowing existing promoters to bid for their assets, the objective of the insolvency process will be defeated. In June this year, the RBI asked banks to send 12 companies to National Corporate Law Tribunal for resolution under the IBC after they failed to repay their loans consistently. Of these 12 companies, five steel companies and Amtek Auto have drawn proposals from prospective  buyers. As of now, promoters are allowed to submit a resolution plan that will ultimately require banks to take a haircut as high as 50 per cent on their loans.

FIRMS’ VALUATION UNDER THREAT

• Govt recently issued an ordinance to debar wilful defaulters, those with one year or more NPA, from bidding 
• Those associated with such entities also cannot present resolution plans
• Ordinance technically forbids promoters from bidding for their own firms
• Resale curbs could plug loophole in ordinance that let financers to hand over auctioned firm to any person for management
• But analaysts say move may substantially reduce valuation at which these companies will be sold
• Further amendments could also include specifying who is a promoter 
• Resolution plan for 12 big cases to be presented starting January 2018