Insolvency resolution: Bidding for Monnet Ispat delayed again

Bidders seek clarity on tax tangle

The financial bidding for Monnet Ispat, the first of the stressed steel companies to go on sale, has been put on hold for a second time as bidders sought clarity on income tax (I-T) liabilities. The bids were due on Monday. 

The bidders are worried that the I-T department would levy a tax on the haircut and interest foregone by the lenders on these assets once a new owner takes over the company, said a source. “The bidders sought clarity on the tax tangle to make their own calculations to ascribe a value to the assets,” said a banker. The bidding was put on hold earlier after lenders sent the company to the National Company Law Tribunal (NCLT) for a resolution.

Unlike the erstwhile Sick Industrial Companies Act (SICA), which had exempted I-T for sick companies, companies coming under the Insolvency and Banking Code (IBC) are not getting any tax breaks, which could lead to lower valuation of these assets by potential bidders. The income-tax (I-T) issue will be a serious hurdle in the sale of other NCLT-referred companies such as Bhushan Steel, Bhushan Power & Steel, and Essar Steel.

Five companies, including Edelweiss Asset Reconstruction Company, Blackstone, TPG, AION Capital (a joint venture between ICICI Venture and Apollo Global Management) together with JSW Steel and Hong Kong-based SSG Capital, are in the race to buy Monnet’s assets. 

The I-T law provides that the haircut from lenders is income in the hands of the companies under the IBC and they would be taxed accordingly. “Besides, if there is any reduction in interest rate by the lenders in the form of discounted debt instruments by virtue of the provisions of Indian Accounting Standards (IndAS), the valuation in the financial statements will increase the company’s profit. In such cases, if the company is under MAT, it will be subject to tax on such profits. This would create a double whammy and, therefore, a tax-friendly solution is critical,” Riaz Thingna, director, Grant Thornton Advisory, had said recently. 

Monnet Ispat’s debt had climbed to over Rs 12,262 crore as of March 31, 2016. Its sales were Rs 1,238 crore with a loss of Rs 2,129 crore. Its shares, however, climbed up by 50 per cent in the past one year to Rs 34 a share as of Thursday.

In fact, even before the IBC process started, JSW Steel had bid for Monnet Ispat. It was one of the first companies in which lenders had converted their debt into equity as part of the strategic debt restructuring. However, lenders found the haircut implicit in the JSW Steel offer was too steep and didn’t take a call. The company was then sent to NCLT so that it can be sold to the highest bidder with bankers set to take 50-60 per cent haircut.