Insolvency Code ordinance: Promoters' loss is PEs' gain

The ordinance has barred most promoters of the defaulting firms from bidding for their assets in the bankruptcy auction

Private equity (PE) players are getting ready to bid for stressed assets, which they expect to bag at attractive valuations after an ordinance amended the Insolvency and Bankruptcy Code (IBC). The ordinance has practically barred most promoters of the defaulting companies from bidding for their assets in the bankruptcy auction.

PE players have raised distressed assets funds totalling over $4 billion in the past two years, sensing an opportunity in the increasing number of bad assets in the banking system. These include a $1.04-billion fund raised by Brookfield and SBI in July 2016 and a $1-billion fund raised by Piramal Group and Bain Capital in August 2016.

The change in the IBC comes at a time when 11 of the 12 cases mandated by the Reserve Bank of India (RBI) for early bankruptcy proceedings are in an advanced stage of auctioning assets. 

"One can expect that prices that would be realised through these auctions may be on the lower side now," said Sharad Bhatia, managing director, Multiples Alternate Asset Management, a home-grown PE fund headed by Renuka Ramnath. 

Other PE industry executives agreed with him. “PE players are enthused as assets would be priced more attractively now,” said the head of a foreign fund, which had raised money to bid for some of these assets. 

“Promoters are in the best position to price an asset as others with limited information would have to factor in unknown risks into their bids," Bhatia said, giving the rationale for softening in asset prices.

The ordinance prohibits promoters or sister concerns of companies with non-performing assets (NPAs) of more than a year from bidding for these companies. 

In order to bid, promoters will have to make the NPAs standard assets by paying the principal and interest. This would bring down competition for these assets when these are auctioned. 

The 12 cases currently under the process include Bhushan Steel, Lanco Infratech, Essar Steel, Alok Industries, and Amtek Auto. Bhatia said, “It would not be surprising if some of the promoters of these 12 companies move court. Also, some promoters can get hostile to the process and delay information sharing with IRPs (insolvency resolution professionals)."

Distressed assets funds have almost been non-starters in India. This despite banks having Rs 10 lakh crore in stressed assets — Rs 7.8 lakh crore of bad loans and Rs 2.2 lakh crore of restructured ones. The IBC, which took effect last year, has given hope of a fair resolution in a time-bound manner, as the assets go for liquidation if a resolution is not found in 270 days.

These funds held back from investing because of the lack of a regulatory framework to protect their interests and to provide them with control over the assets. They first got enthused with the RBI introducing strategic debt restructuring two-and-a-half years ago. This allowed conversion of debt into equity, to provide lenders control over these assets. 

Global funds such as Brookfield, Canada Pension Plan Investment Board (CPPIB), and International Finance Corporation (IFC) tied up with domestic players State Bank of India, Piramal group, and Kotak Mahindra Bank, respectively, rolling out their distressed assets funds last year. However, they have not made any major investments yet. Banks were unwilling to take haircuts for providing an appropriate capital structure to the new buyer. 

Some of these PE funds are also looking to jointly bid for these assets with a strategic player having industry experience to overcome operational challenges. “PEs would also prefer to partner with players having a track record in running a similar business,” said India head of another foreign private equity fund.