By Hemant Batra
What was positioned by Indian law makers and policy wonks as the finest antidote for increasing non-performing assets (NPAs) of banks and monetary institutions, resulting in a bigger quantity of organizations going into the liquidation method, has ended up getting a productive rehabilitating and restructuring formula for these bankrupt organizations. These distressed assets have grow to be the new targets for larger organizations organizing to develop via the organic route.
The guidelines and regulations framed below the Insolvency and Bankruptcy Code (IBC) have opened-up numerous possibilities and prospects for merger and acquisition (M&A) offers in India. These possibilities have been utilised productively by organizations and investors wanting to diversify into new corporations or expanding and consolidating their current corporations.
After all, the statutory mandate or pre-requisite of the IBC is to provide a resolution or extended-term sustainability of distressed assets of corporate debtors rather than take the liquidation route, which was kept as a answer of last resort. Then there are components of concessions, adjustments and alterations below the Code, which can be exercised by owners, stakeholders, and creditors in distinct situations to make certain that corporate restructuring is authorized below the IBC, and benefits in the revival of the bankrupt entity.
Under the IBC, there are two principal avenues for mergers and acquisition (M&A) of assets. The 1st is the rapid-track method, exactly where the corporate debtor’s assets are unencumbered, which means outdoors the ordinary course of business enterprise, like individual points such as books, autos and so forth. So, the new promoter requires more than only the current business enterprise with all its assets. Secondly, exactly where the assets are encumbered or a component of the business enterprise, and the creditors have currently initiated a corporate insolvency resolution method (CIRP) against the corporate debtor.
In the case of the former also the approval of a committee of creditors (CoC) becomes a precondition ahead of any takeover, even though it is a substantially more rapidly method. In the case of the latter, the resolution strategy crafted by the CIRP, may possibly provide for transfer or sale of all or component of the assets of the corporate debtor to one or more persons, and substantial acquisition of shares, or the merger or consolidation of the corporate debtor with one or more persons. The resolution strategy may possibly also let for divesting all or some components of the corporate debtor’s assets via M&A action more than a predetermined period following the productive conclusion of the CIRP.
As the saying goes, the devil is in the facts. Thus, it is crucial to comprehend the specifics of the insolvency resolutions, and study the productive M&A, which have been concluded given that December 2016, when the IBC came into existence, ahead of taking any choice. According to official figures, the IBC has correctly rescued 308 corporate debtors as of December 2020 via resolution plans which includes M&A. These corporate debtors owed Rs. 4.99 lakh crore to the creditors. Under IBC, the creditors recovered Rs. 1.99 lakh crore, which was 193 per cent more than the realisable worth of the assets.
The IBC has facilitated the recovery of NPAs by banks via the M&A route and corporate restructuring. Only a handful of situations accounted for a significant proportion of public debts. The creditor banks commenced the resolution method of 12 significant accounts in mid-2017. Their total recoverable dues stood at Rs. 3.45 lakh crore as against the low liquidation worth of about one-fifth of the recoverable dues. Out of these 12 major corporations, nine certified for profitable M&A and fetched worthwhile recoveries from the banks’ viewpoint. For instance, Essar Steel India Limited was acquired by Arcelor Mittal India Pvt. Ltd. for Rs. 41,018 crores as against the outstanding dues of Rs. 49,473 crores.
Other major defaulting accounts like these of Bhushan Steel Limited, Bhushan Power & Steel Limited, Jaypee Infratech Limited, Alok Industries Limited and so forth. have been also acquired by bigwigs like Vedanta Ltd. Monnet Ispat & Energy Limited, Reliance Industries Limited, NBCC (India) Limited and so forth. at quite higher worth. These productive situations of M&A speak a lot about the efficiency and usefulness of the IBC.
The new route of M&A via distressed assets, on the other hand, is facing a couple of challenges. There are normally challenges related with bidding and acquisition of distressed assets. Valuations of such assets need to have to be adequately insulated from its erstwhile promoters and owners, who use proxies to either derail the bidding method, or jack up the valuations.
Further, regardless of the protection offered by the law with regards to the marketability of assets, the Supreme Court judgement in the Ghanshyam Vs Edelweiss of April 2011, and the rule of no interference from any other civil court in respect of any action taken or to be taken with regard to any order passed by the Adjudicating Authority i.e. the National Company Law Tribunal, some acquirers and investors had to face some legal complications in their M&A objective.
For instance, the query of how the penalty for regularising any non-compliance of the earlier management is getting imposed on the new management nevertheless remains unanswered? Similarly, how the earlier clearances/regularisation are supposed to be treated, nevertheless stay unclear.
Hence, in spite of all statutory assurances for smooth acquisition and corporate restructuring, the new entrants may possibly have to hold in thoughts the significance of due diligence of the nature and status of assets, and also make certain that there is no overlap of any legal proceedings involving the assets of the promoters, specifically quasi-criminal proceedings.
(The author is a Delhi-based corporate and public policy lawyer and counsel. Views expressed are individual and not necessarily that of TheSpuzz Online.)