Tata Steel's takeover of Bhushan Steel: IBC's 'operational' test case

Deal is the first to reach resolution under bankruptcy code, leaves the case of supplier-creditors partially unresolved. How this issue pans out will determine future cases

A series of tweets from Piyush Goyal, the officiating minister in the ministry of finance, on Friday set the tone of government narrative on the first major sale under the Insolvency and Bankruptcy Code (IBC), which celebrated its second anniversary of parliamentary approval on May 5. The same day as Goyal’s tweets, Tata Steel announced that it had completed its purchase of 72.65 per cent in Bhushan Steel after it reached a settlement with a committee of creditors for Rs 352 billion, along with a 12 per cent equity to the creditors.

"Congrats to PM @narendramodi ji & @arunjaitley ji for a historic breakthrough in resolving legacy issues of banks," said the minister's first tweet. Goyal said lenders recovered almost the entire principal loan of Bhushan Steel through a transparent bid by Tata Steel plus a stake in the company. Another Rs 12 billion has been set aside by the resolution professional for operational creditors. The minister affirmed the liquidation value of Bhushan Steel was Rs 145.41 billion but creditors managed to receive almost four times the amount, implying that both the company and creditors got a bargain that was better than a fire sale of the company’s assets. Goyal also gave due credit to "the robust and transparent" IBC brought in by the government.

Is this first successful bankruptcy resolution under the IBC really such a big deal? Ravikant Bhat, research analyst, Emkay Global Financial Services, describes it as a “positive structural development for the banking sector”. As he points out, the haircut on admitted claims amounts to 37 per cent of the dues to banks, lower than the 50-plus per cent that was provisioned for, while the actual haircut on outstanding non-performing assets or NPAs would be 25 per cent lower. "The first National Company Law Tribunal (NCLT) list has NPAs amounting to Rs 2.56 trillion under final stages of resolution (except ERA Infra, which has been admitted recently),” he added.

Certainly, a precedent has been set in more than one way for the insolvency cases. Bhushan Steel was one among a dozen cases notified by the Reserve Bank of India, which put lenders on notice in June 2017. While disqualified bids and flexible deadlines have been obstacles to the resolution of other cases under the IBC, Bhushan Steel was one of the easier ones to get off the block, where an agreement on resolution was reached within the deadline of April 22 or 270 days from when insolvency was invoked.   

RICH PICKINGS 

Financial details of the Bhushan Steel and Power deal  

• Creditors get Rs 352 billion in cash, along with a 12% per cent equity stake 
   
• SBI may get Rs 128.72 billion
   
• PNB Rs 49.04 billion
   
• ICICI Rs 24.49 billion
   
• Liquidation value was earlier estimated at Rs 145.41 billion 
   
• Bhushan Steel’s turnover for 2016-17 was Rs 150.99 billion
   
• Company declared insolvent on July 26, 2017

With Tata Steel completing the takeover, this case appears to be settled. One subsidiary but no less critical issue needs to be sorted out and will also determine the success of other IBC cases going forward – that of “operational creditors,”  or unpaid suppliers as opposed to financial creditors or lenders, and the charge is being led by engineering major Larsen & Toubro (L&T), which is seeking a settlement of dues worth Rs 9.61 billion from Bhushan Steel for constructing a plant in Odisha.   

"This (Bhushan Steel) is a resolution for banks only, but there should be parity between financial and operational creditors. Ours will be the first case, where this issue will be considered," says a senior Larsen & Toubro executive. Initially, L&T had contested that it was not an operational creditor; now, in case the National Company Law Appellate Tribunal (NCLAT) rules that it is one, it is seeking the lion’s share (something like 80 per cent) of the amount set aside for this category of creditors.

The issue comes down to this: essentially, it is the financial creditor's money that is routed through a company and find its way to suppliers, but if these suppliers are not paid, they turn into operational creditors. Under Section 5(21) of the IBC, operational credit is "claim in respect of the provisions of goods or services including employment or a debt in respect of the repayment of dues arising under any law" and payable to the Central, state or local government.

 L&T’s petition before NCLAT gives details of how the Resolution Profession has reserved Rs 12 billion for operational creditors. The distribution of this money is, however, not clear. One way would be to decide based on the same percentage of dues for all claimants. L&T’s petition, along with one from employees, was dismissed by the lower tribunal and both petitioners were charged penal costs. The NCLAT order on this issue is expected on May 30.

A fair deal with operational creditors could well counter the perception that the IBC law has been designed to suit only banks.  Nevertheless, the government has left it to the Supreme Court to read the legal fine print for other affected parties like the home-buyers, in the case of Jaiprakash Associates.

Addressing these issues are, however, as crucial to the IBC process as finding a buyer. Despite the government's political labelling of NPAs as a legacy of the former United Progressive Alliance, Goyal's claim that banks will now be in a position to offer more and affordable credit to major sectors of the economy, especially the small and medium sector, will be a reality only if operational creditors are taken along. Until then, bad loans will continue to haunt those further down the supply and manufacturing chain, especially since a flood of cases especially from the power sector are expected to line up in front of NCLT in the coming months.