Indian companies and promoters battling to take control of distressed firms forced into bankruptcy are calling for erstwhile promoters of these firms to be shut out of bidding for their companies. Sajjan Jindal, steel and energy magnate and chairman of India’s largest private sector steel group JSW, said that dubious promoters should not be allowed to bid for companies which had run aground under their management.
“Dubious promoters should not be allowed to submit the rehabilitation plan to prevent misuse of the IBC. Also the bidding criteria should be spelt out explicitly prior to inviting the bids. This will avoid likely litigation…” Jindal said on Twitter on Wednesday.
Some other promoters and senior executives of companies that are preparing to bid for these assets also seconded this view.
“I don’t think the promoters of companies which are referred to Insolvency and Bankruptcy Board should bid as they will have inside information of the company as against other bidders,” said a chairman of a leading company which is preparing to bid for assets. ‘’The problem is that these promoters got the company into this position. If the process has to be transparent, it is better to keep them away from bidding for the assets.”
“The entire purpose of the Insolvency and Bankruptcy Code will be defeated if the existing promoters are allowed to bid for these assets,” a senior executive of a metal conglomerate said. ‘’There has to be a fit and proper criteria to bid for these assets otherwise the promoters will be getting the benefit of mismanaging the company.”
The Insolvency and Bankruptcy Board of India (IBBI) amended regulations to the code late on Tuesday allowing promoters to bid for their assets only after their creditworthiness has been tested.
“Though there is no restriction on as to who can submit a resolution plan, it should come from any person, who can really rescue the insolvent business and the Committee of Creditors is expected to approve the best of them,” IBBI said in a release on Tuesday.
“According to the amendments, a resolution plan shall disclose details of the resolution applicant and other connected persons to enable the Committee of Creditors to assess credibility of such applicant and other connected persons to take a prudent decision while considering the resolution plan for its approval.”
Recent reports indicate that the promoters of Essar Steel, which has been referred to bankruptcy courts, are considering a bid for the company and will submit a plan to the resolution professional.
This created a controversy as a restructuring plan under the bankruptcy courts always involves a haircut from lenders and possible concessions on interest payment. The sale to prospective also happens at a substantial discount and a purchase by former promoters could lead to an outcry and accusations of rigging.
The bankruptcy law does not prohibit promoters from bidding for or taking back their assets but the Insolvency and Bankruptcy Board (IBBI) issued a fresh set of instructions late on Tuesday night outlining the due diligence steps that need to be followed before preparing resolution bids.
Some lenders including State Bank of India is of the view that promoters have the right to bid for their companies but should not entertain wilful defaulters.
‘’Promoters are within their rights to participate in the bidding process for their own companies,” Rajnish Kumar, chairman of State Bank of India, said on Monday.” However, banks will not entertain wilful defaulters or promoters who have been red-flagged by the forensic auditor.”
People associated with resolution proceedings and prospective investors agreed with the logic of allowing promoters to bid and considering them if their offers are better than those of others in the fray.
Currently, while assessing bids, lenders use the concept of net present value, assigning a weightage of 1.25x to an upfront payment over offers to pay over a longer duration.
‘’An offer to pay over a longer time is not attractive to banks on the basis of net present value if there is somebody else offering an amount upfront,” Seshagiri Rao, joint MD of JSW SteelBSE -0.78 %, told reporters during the company’s quarterly results conference. “Therefore, the bidding criteria need to be looked at and finally how it will shape up in each case.”
Some insolvency officials said there is wisdom in letting promoters bid for these assets if they do not seek loan and the bid is higher than that of their rivals.
“If a promoter is not asking for a fresh loan and is willing to pay more than other bidders, there is wisdom in lenders accepting the promoter’s offer,” a person involved in one of the insolvency proceedings said. “However, if a promoter offers to pay part of the amount and promises to pay the remaining over time, his creditworthiness, track record and ability to pay will have to be assessed.”
JSW Steel is one of the firms keen to buy stressed assets referred to National Company Law Tribunal.