Just as a bunch of high-value assets are about to exit India’s fledgling bankruptcy process, it appears founders won’t relinquish control of their steel, power and cement plants without exhausting every last legal trick in the book.

A knot of clumsily crafted eligibility rules introduced by the government in November have become a thorn in the side of bidders like ArcelorMittal.

The idea behind restricting the playing field was to ensure that stressed assets don’t end up with the same business families who choked the state-dominated banking system with $207 billion in bad loans. The net effect may be just the opposite.

The Big Fizzle

A $32 billion recap of Indian state-run banks made investors optimistic, but a $1.8 billion fraud and delays in bad-loan resolution have erased most of those gains

Source: Bloomberg

Disqualifying winning bids — or tying them up in legal knots — is what rival suitors and erstwhile controlling shareholders are counting on. If bidding is reopened with more relaxed eligibility norms, that would give them a second chance to buy the assets, perhaps for less.

The biggest loser may be Lakshmi Mittal. The London-based billionaire’s ArcelorMittal has had to dump its 29 percent stake in Uttam Galva Steels Ltd., an embattled cold-steel maker, for a token amount so it’s no longer a related party to a firm in default. It has done so to avoid being disqualified from bidding for a much larger prize — the billionaire Ruia brothers’ Essar Steel Ltd., which is currently in bankruptcy after failing to service the $8.1 billion it owes creditors.

However, the amended bankruptcy law is quite clear: Before making a bid, Mittal needs to make “payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts.”

Selling one stressed asset, the Ruias are bound to argue, doesn’t make Mittal eligible to buy another. Yet, as things stand, the ArcelorMittal bid is higher than that of a consortium led by Russia’s state-controlled VTB Group, which includes the Ruias. Whether the brothers’ presence as a minority partner disqualifies that offer is another question. Since there’s no third bidder, Essar creditors probably face a long wait before they get a cent of the $6 billion they’re hoping to realize.

The bankruptcy resolutions of Binani Cement Ltd., Videocon Industries Ltd. and Jaypee Infratech Ltd. have already got stuck in legal quicksand and, as Dev Chatterjee notes in Business Standard, Essar and Bhushan Power & Steel Ltd. are headed the same way.

Bankruptcy Bazaar

Among the 12 large corporate defaulters earmarked by the Reserve Bank of India last June for a 180-day resolution by insolvency tribunal, the top five alone owe creditors a combined $36 billion

India’s Economic Survey 2017-18

In the case of Bhushan Power, the challenger is Liberty House U.K. Plc, whose bid was cast aside by the resolution professional appointed by the National Company Law Tribunal because it missed a deadline he had set. Other bids hadn’t yet been opened, and creditors wanted to see Liberty’s offer, the British company told BloombergQuint, adding that it would contest the “bizarre system” where lenders are denied recovery by resolution professionals.

Liberty is trying to dislodge the winning bid by Tata Steel Ltd., which is trying to overtake JSW Steel Ltd. as India’s No. 1 steelmaker. The Tatas have offered $5.6 billion for Bhushan Steel Ltd., another troubled borrower. That price is almost $1.6 billion more than the closest bid by JSW, according to Business Standard.

Whoever wins, it’s crucial for creditors that the sales close quickly, and at a good price. Take state-run Punjab National Bank, hit recently by an embarrassing $1.8 billion fraud. For PNB, being able to cash the Tata check means writing back some of the excess provisions on its Bhushan exposure.

But a whisper campaign is afoot suggesting the Tatas’ bid should be disqualified because of a business relationship with C. Sivasankaran, a telecom investor declared bankrupt in the Seychelles in 2014.

That, to me, sounds like a far-fetched argument to take to court. But why blame the bidders for trying? In steel alone, there’s at least $26 billion of assets at stake.

Strict eligibility criteria have made it too easy for competitors to narrow the field by pointing the finger. Lawyers will make their money long before India’s struggling creditors see a penny.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Hong Kong at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net

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