Insolvency and Bankruptcy Code: Lenders, bidders split on assets valuation

Banks want enterprise value; bidders say insolvency law provides for only liquidation value

Lenders and prospective bidders are having a serious difference of opinion on the valuation of toxic assets, to be auctioned under the modified insolvency law. While the lenders are insisting that resolution professionals get the enterprise valuation of these companies done to ensure sale negotiations begin from a higher point, the bidders say such firms should be sold at a “scrap” value in accordance with the provisions of the Insolvency and Bankruptcy Code (IBC).

The IBC provides for a liquidation value, which is calculated by registered valuers and is currently the starting point for the process. The enterprise value is a measure of a company’s total value, and is calculated as the market capitalisation plus debt, minority interest, and preferred shares, minus total cash and cash equivalents.

“The enterprise value factors in future projections. We are not in a position to assess the enterprise value, but lenders are insisting on getting it done. So we will ask the registered valuers who calculated the liquidation value to find out the enterprise value also,” said the resolution professional for a stressed steel asset. “The logic is that since the sale is being done on a going-concern basis, the negotiation should be on the basis of an enterprise value.”

Recently, Neeraj Singal, promoter of Bhushan Steel, also told Business Standard that the valuation should be done on a going-concern basis. The going-concern principle is the assumption that an entity will remain in business for the foreseeable future. 

Another resolution professional representing a large stressed steel asset said apart from the enterprise valuation, lenders also want an asset valuation done. Asset valuation is the replacement cost of setting up a plant minus the depreciation cost. “The credit committee had decided to get an asset valuation done. Registered valuers will do it,” he said.

At a time when the promoters of stressed companies have been practically debarred from bidding for their own assets, the move to get an asset valuation done would ensure that there is no distress sale. It will, however, delay the entire process by a few months.

Prospective bidders said the insolvency law was clear about the valuation of the companies referred to the National Company Law Tribunal (NCLT). “These assets have to be sold at a scrap value as per the law. Enterprise valuation and asset valuation would just delay the entire process by a couple of months,” a potential bidder said, requesting not to be named. “It’s not obligatory to get the enterprise valuation done, according to the insolvency law,” he added. 

The lenders might be seeking enterprise and asset valuations so as to compare various offers received by them, he said. Citing an example, the bidder said the sale process for Monnet Ispat had been postponed twice and now, with the promoter out of the race, the expressions of interest (EoIs) received from nine potential bidders would have to tested under the new Ordinance. 

If the enterprise and asset valuations are done for Monnet now, then the process will take more time. The financial bids for Monnet were due on Monday (November 27), but the process will be delayed by a few months. Bidders are also getting their own independent valuations done, so that they can make their offers to the insolvency professionals. Earlier, most financial bids of the large steel companies were expected in December.  

With the threat of litigation looming over the sale of these assets from the promoters debarred from bidding, the process might get derailed, say lawyers.