Toxic assets: Soon, ordinance to block defaulters from bidding

Lenders, IRPs want upfront payment before auction

The government is taking steps to disallow defaulters from bidding for toxic assets by amending the insolvency law and, at the same time, asking all bidders to make an upfront payment with their resolution proposals.

According to a top source in the government, the Ministry of Corporate Affairs will move a Cabinet note as early as next week, seeking to insert an additional section in the Insolvency and Bankruptcy Code (IBC) and amend a few other existing sections to bring in rules for promoters to bid for their companies.

The ordinance has been necessitated as the government thinks that by allowing existing promoters to bid for their assets, the entire objective of the insolvency process would be defeated.

Recently, the government came up with a clarification on rules for accepting bids and added provisions to the existing rules in the IBC. The new rules sought creditworthiness and track record of the resolution application to be declared to the committee of creditors.

In June this year, the Reserve Bank of India (RBI) asked banks to send 12 companies to the National Company Law Tribunal (NCLT) for resolution under the IBC after they failed to make repay loans. Of these 12 companies, five steel companies and Amtek Auto have got a few proposals from prospective buyers.

As of now, promoters are allowed to submit a resolution plan that would ultimately require banks to take a haircut of as high as 50 per cent on their loans. The promoters of Essar Steel, Bhushan Steel, and Bhushan Power and Steel are planning to submit their offers to insolvency resolution professionals (IRPs) in December.

Interestingly, existing promoters are allowed to bid for their companies in insolvency proceedings in the US.

The Ruias of Essar have tied up with VTB Bank of Russia to make an offer for their 10 million tonne per annum plant in Hazira, Gujarat. Similarly, Jaypee Associates tied up with the JSW Group to bid for Jaypee Infratech’s real estate assets.

While the government is planning the ordinance, the evaluation criteria for bidders are also being changed. “Extra weight will now be given to investors who bring in capital in the form of equity or make part of the payment upfront,” said a resolution professional handling a stressed steel asset.

The resolution professional admitted that the process would naturally screen existing promoters who were defaulters. “They are defaulters; it is unlikely that they would be able to bring in equity,” he said.

Earlier, higher weight was given to maximum debt servicing. “The entire discussion started when the debate around a promoter’s bidding came up,” said the resolution professional.

Weight would also be given to bidders’ experience in turning around businesses and if there were defaults in the past. This criterion will again go against existing promoters.

JSW Steel promoter Sajjan Jindal had recently said “dubious” promoters should be banned from bidding. Jindal said bid eligibility and evaluation criteria must be disclosed upfront and applied uniformly in all accounts. “It’s important as we cannot have different criteria for different companies,” he said.

An IRP professional in Mumbai said if there was a risk of litigation from the existing promoters, that would discourage new promoters to invest in these companies. “As I see it, many of these companies will go into liquidation and the assets would be sold to different buyers,” he added.