Lenders prefer sectoral guidelines for choosing buyers in insolvency sales

Banks that are part of the consortium of lenders for companies referred to the National Company Law Tribunal (NCLT) have come to a consensus that there should be sectoral guidelines for selection of bidders among those who show an interest in acquiring any of the stressed assets put up for sale.

Bankers, who held meetings on this issue a few days ago, looked at three alternative evaluation matrices — whether the evaluation criteria should be different from company to company; whether these should be common across all companies, irrespective of the industry; or the third option of their being pegged to a particular sector. So, for instance, the criteria for choosing bidders for all steel companies will be the same, but these will differ from the criteria for automobile component companies.

Those involved in the discussions say the guidelines for selection need to be transparent, otherwise anyone who loses out could take legal recourse leading to wastage of time and derailing the whole process. They point out that the draft guidelines for making a non-binding bid for Monnet Ispat, which has a deadline till November 16, have already been circulated for discussions. Those who have placed expressions of interest will bid based on the criteria set out by this document.

Some bankers Business Standard spoke to said they preferred sector-specific rules. They also want to set a proper formula to determine the reserve price. A representation to this effect has been sent to the ministry of corporate affairs. 

Banks feel that there should be stringent and specific guidelines as it is not just their dues but also the fact they have been asked to maintain high provisioning for these companies. Bankers feel that if a company is sold at less than half its valuation it will be unfair for creditors.

Experts say that the final decision on who wins the bid  will be based on a five-step process, which involves recommendations from both the merchant banker as well as the insolvency professional. Their recommendations will be discussed by a management committee comprising the top five lenders to the company. The recommendations of this small group will then be put up to the committee of creditors, which is represented by the entire consortium of banks that has provided the company its loan. Here it will be put to vote, based on a proportionate system pegged to the amount of exposure, and must secure 75 per cent of the votes after which it will be referred to the NCLT, which will take the final decision.    

The insolvency and bankruptcy code allows the resolution professional to open the bidding for a company in an attempt to restructure it. If there is no buyer for the company, then a resolution plan is prepared by the resolution professional which is then placed before the committee of creditors for approval. After this, the NCLT looks at the plan. The NCLT has taken up 12 big-ticket cases referred by the Reserve Bank of India that constitute about 25 per cent of the total bank non-performing assets. These include large steel companies like Essar Steel, Bhushan Steel, Bhushan Steel and Power, Electrosteel and Monnet Ispat; automobile components company Amtek Auto; and real estate and construction giant Jaypee Infratech.Under the rules, banks must undertake 50 per cent provisioning of their debt. 

Various companies which include leading PE funds like TPG, Blackstone, SSG and AION apart from Tata Steel, JSW and Arcelormittal have expressed interest in acquiring these companies. Also PE funds have tied up with corporates to bid together, like AION and JSW for Monnet Ispat.

Those bidding say that the enterprise value of companies like Essar Steel and Bhushan Steel should not be more than $5 billion. They argue that with debts of $7-8 billion on their books and a provisioning of 50 per cent they will be willing to take over the smaller debt ($4 billion) of the company and pay $1 billion as cash upfront for the sale. With a partner, this means PE funds will have to write a cheque of $300-500 million as they will also receive mezzanine credit for financing the payment.  Banks, of course, have the option to convert part of the debt into equity.