Due diligence of stressed assets under the Insolvency and Bankruptcy Code, 2016 (IBC) remains a big challenge, said Koushik Chatterjee, chief financial officer and executive director at Tata Steel, speaking at the Confederation of Indian Industry (CII) conference on mergers, acquisitions and restructuring held in Mumbai.
“In cases of IBC, due diligence is a challenge,” said Chatterjee. “The issue in diligence of an IBC asset is that you will not get everything— all the information and all the access, and the resolution professional himself is struggling with managing that business,” he said.
In May 2018, Tata Steel acquired Bhushan Steel for ₹35,200 crore, besides ₹1,200 crore it paid to creditors to convert the remaining debt owed to banks to equity. The acquired entity was renamed and renamed it Tata Steel BSL Ltd.
The transaction was done through corporate insolvency resolution process of the IBC. Later in June, it also completed the acquisition of Bhushan Steel’s subsidiary, Bhushan Energy for about ₹800 crore, again, via the IBC process.
Chatterjee said protection from litigations arising out of past liabilities will provide investors much needed comfort when acquiring these assets.
“The other challenge is because these are stressed assets, it is but natural that they will not be compliant; either they wouldn’t have paid their taxes in many cases or they will have difficult lender relationships. So, one cannot assume the same mindset of a non-hostile M&A process in these kind of equations. In these circumstances, if a whitewash is not available then it would make the new investor fairly uncertain on how to deal with the asset,” said Chatterjee.
This is specifically pertinent to JSW Steel Ltd.’s $2.7 billion acquisition of Bhushan Power & Steel Ltd. under the new bankruptcy process. In this case, Bhushan Power struggled with multiple accounting frauds including those totaling about ₹5,600 crore reported by Allahabad Bank Ltd. and Punjab National Bank. But while approving JSW Steel’s resolution plan, the National Company Law Tribunal (NCLT) refused to grant immunity to the post-insolvency avatar of Bhushan Power from ongoing criminal investigations.
“As the resolution is happening, from the date of the approval of the resolution all the past liabilities should no more be applicable to the new company,” said Chatterjee.
As of June 30, only 120 of the 2,162 cases under IBC were close to resolution. Similarly, of the ₹2.53 trillion claims admitted under the IBC process, only 42.8% of claims worth ₹1.08 trillion were recovered, according to a report by Bain & Co. released on Thursday.
Source: Livemint, September 26, 2019