Focus on market for resolution assets

Focus on market for resolution assets

First resolution under IBC sees a big haircut.

It is welcome that the first resolution under the Insolvency and Bankruptcy Code (IBC) has been completed, with the National Company Law Tribunal (NCLT) approving mining giant Vedanta’s plan to acquire Electrosteel Steels, with its 1.5-million-tonne plant in Jharkhand. Vedanta has proposed to acquire Electrosteel for Rs. 5,320 crore, of which Rs. 1,805 crore would be used to subscribe to the company’s equity and the balance Rs. 3,515 crore would be provided by way of a debt. The company owes lenders around Rs. 13,175 crore, implying that the lenders would take a haircut of over 60%. This is fairly steep, but that was the highest price offered for Electrosteel. The two other bidders were Renaissance Steel and Tata Steel. Accepting the highest price on offer for the resolution asset is the right thing to do.

Vedanta will hold a 90% stake in the company, and the balance 10% will go to existing shareholders and financial creditors who get shares in exchange of the debt owed to them. This means one more player in the steel sector, one with ready backward integration into minerals: Vedanta has an iron ore plant in Jharkhand, and fines in Goa. A company statement said that the transaction would complement the group’s iron-ore business as the vertical integration of steel-manufacturing capabilities has potential to generate significant efficiencies. Renaissance Steel had contested Vedanta’s eligibility, but the NCLT reportedly ruled that the company was eligible to bid.

The bankruptcy law is being tested in India. The committee of creditors, which evaluates a resolution plan, assigns scores to various parameters that include business strategy and financial position of the bidder. Rightly, the highest weightage is given to the final sale price in cash upfront. Any resolution plan must be fair to banks, and the highest bidder should be allowed to acquire the distressed asset. Minimising haircuts that banks have to take is eminently feasible when there is healthy competition in the bidding. This, in turn, calls for creating a competitive market for distressed assets.