Insolvency and bankruptcy code: The new route to M&A

For instance, Essar Steel India Limited was acquired by Arcelor Mittal India Pvt. Ltd. for Rs. 41,018 crores arsenic against the outstanding dues of Rs. 49,473 crores.

By Hemant Batra

What was positioned by Indian instrumentality makers and argumentation wonks arsenic the champion antidote for rising non-performing assets (NPAs) of banks and fiscal institutions, resulting successful a larger fig of companies going into the liquidation process, has ended up being a palmy rehabilitating and restructuring look for these bankrupt companies. These distressed assets person go the caller targets for bigger companies readying to turn done the integrated route.

The rules and regulations framed nether the Insolvency and Bankruptcy Code (IBC) person opened-up countless opportunities and prospects for merger and acquisition (M&A) deals successful India. These opportunities person been utilized productively by companies and investors wanting to diversify into caller businesses oregon expanding and consolidating their existing businesses.

After all, the statutory mandate oregon pre-requisite of the IBC is to supply a solution oregon semipermanent sustainability of distressed assets of firm debtors alternatively than instrumentality the liquidation route, which was kept arsenic a solution of past resort. Then determination are elements of concessions, adjustments and alterations nether the Code, which tin beryllium exercised by owners, stakeholders, and creditors successful circumstantial cases to guarantee that firm restructuring is approved nether the IBC, and results successful the revival of the bankrupt entity.

Under the IBC, determination are 2 main avenues for mergers and acquisition (M&A) of assets. The archetypal is the fast-track process, wherever the firm debtor’s assets are unencumbered, meaning extracurricular the mean people of business, similar idiosyncratic things specified arsenic books, vehicles etc. So, the caller promoter takes implicit lone the existing concern with each its assets. Secondly, wherever the assets are encumbered oregon a portion of the business, and the creditors person already initiated a firm insolvency solution process (CIRP) against the firm debtor.

In the lawsuit of the erstwhile excessively the support of a committee of creditors (CoC) becomes a precondition earlier immoderate takeover, though it is simply a overmuch faster process. In the lawsuit of the latter, the solution program crafted by the CIRP, whitethorn supply for transportation oregon merchantability of each oregon portion of the assets of the firm debtor to 1 oregon much persons, and important acquisition of shares, oregon the merger oregon consolidation of the firm debtor with 1 oregon much persons. The solution program whitethorn besides let for divesting each oregon immoderate parts of the firm debtor’s assets done M&A enactment implicit a predetermined play pursuing the palmy decision of the CIRP.

As the saying goes, the devil is successful the details. Thus, it is imperative to comprehend the specifics of the insolvency resolutions, and survey the palmy M&A, which person been concluded since December 2016, erstwhile the IBC came into existence, earlier taking immoderate decision. According to authoritative figures, the IBC has efficaciously rescued 308 firm debtors arsenic of December 2020 done solution plans including M&A. These firm debtors owed Rs. 4.99 lakh crore to the creditors. Under IBC, the creditors recovered Rs. 1.99 lakh crore, which was 193 per cent much than the realisable worth of the assets.

The IBC has facilitated the betterment of NPAs by banks done the M&A way and firm restructuring. Only a fistful of cases accounted for a ample proportionality of nationalist debts. The creditor banks commenced the solution process of 12 ample accounts successful mid-2017. Their full recoverable dues stood astatine Rs. 3.45 lakh crore arsenic against the debased liquidation worth of astir one-fifth of the recoverable dues. Out of these 12 large corporations, 9 qualified for lucrative M&A and fetched worthwhile recoveries from the banks’ perspective. For instance, Essar Steel India Limited was acquired by Arcelor Mittal India Pvt. Ltd. for Rs. 41,018 crores arsenic against the outstanding dues of Rs. 49,473 crores.

Other large defaulting accounts similar those of Bhushan Steel Limited, Bhushan Power & Steel Limited, Jaypee Infratech Limited, Alok Industries Limited etc. were besides acquired by bigwigs similar Vedanta Ltd. Monnet Ispat & Energy Limited, Reliance Industries Limited, NBCC (India) Limited etc. astatine precise precocious value. These palmy instances of M&A talk a batch astir the ratio and usefulness of the IBC.

The caller way of M&A done distressed assets, however, is facing a fewer challenges. There are ever challenges associated with bidding and acquisition of distressed assets. Valuations of specified assets request to beryllium adequately insulated from its erstwhile promoters and owners, who usage proxies to either derail the bidding process, oregon jack up the valuations.

Further, contempt the extortion provided by the instrumentality regarding the marketability of assets, the Supreme Court judgement successful the Ghanshyam Vs Edelweiss of April 2011, and the regularisation of nary interference from immoderate different civilian tribunal successful respect of immoderate enactment taken oregon to beryllium taken with respect to immoderate bid passed by the Adjudicating Authority i.e. the National Company Law Tribunal, immoderate acquirers and investors had to look immoderate ineligible complications successful their M&A objective.

For instance, the question of however the punishment for regularising immoderate non-compliance of the erstwhile absorption is being imposed connected the caller absorption inactive remains unanswered? Similarly, however the erstwhile clearances/regularisation are expected to beryllium treated, inactive stay unclear.

Hence, successful spite of each statutory assurances for creaseless acquisition and firm restructuring, the caller entrants whitethorn person to support successful caput the value of owed diligence of the quality and presumption of assets, and besides guarantee that determination is nary overlap of immoderate ineligible proceedings involving the assets of the promoters, particularly quasi-criminal proceedings.

(The writer is simply a Delhi-based firm and nationalist argumentation lawyer and counsel. Views expressed are idiosyncratic and not needfully that of Financial Express Online.)