Mumbai: Insolvency professionals of Essar Steel Ltd and Bhushan Steel Ltd have initiated fresh forensic audits of these companies’ accounts following the recent changes in rules introduced by the bankruptcy regulator, according to five people familiar with the matter.
The purpose of the audit is to ascertain if there was any preferential treatment given by promoters to related parties or any non-related parties during the two years preceding the commencement of insolvency proceedings, and if there were any undervalued or fraudulent or extortionate credit transactions.
These audits will also check for any related-party transactions within group companies. In both cases, promoters have decided to submit their resolution plans to buy back their companies.
Alvarez & Marsal’s Satish Kumar Gupta, is the interim resolution professional (IRP) for Essar Steel while Deloitte Touche Tohmatsu India LLP’s Vijaykumar V. Iyer, is in charge of operations at Bhushan Steel. Spokespersons for both the consulting firms declined to comment.
This is the second instance of a forensic audit being ordered on the books of accounts of both these companies.
Lenders led by State Bank of India (SBI) had also called for a forensic audit in Essar Steel as part of the resolution process but the audit never took off, said one of the bankers cited earlier.
In the case of Bhushan Steel, lenders had asked Deloitte to complete the forensic audit three years ago.
The move to conduct fresh audits comes as insolvency professionals face tighter scrutiny regarding clearance of turnaround plans. Insolvency and Bankruptcy Board of India (IBBI) has sought stringent background checks especially in cases where promoters are one of the bidders of the stressed assets.
On 8 November, IBBI amended its regulations to ensure that lenders take into account the background, credit worthiness and credibility of bidders, including promoters, as part of their due diligence before clearing a turnaround plan.
“The audit conducted is part of the normal course of due diligence process under the bankruptcy proceedings. IBC (Insolvency and bankruptcy code) mandates IRPs to inform the authority about any irregular transactions seen over the last two years," said another person cited earlier.
Essar and Bhushan are two of the 12 stressed accounts identified by the Reserve Bank of India (RBI) in June this year for immediate bankruptcy proceedings. These companies account for 25% of gross bad loans in the system worth Rs7.7 trillion (excluding restructured loans).
Both steel companies have received interest from a slew of potential investors, including financial investors.
JSW Steel, Tata steel and Arcelor Mittal have submitted their expressions of interest for both the companies. State-run Steel Authority of India Ltd (Sail) has also expressed interest to buy Essar Steel. According to a 7 August Mint report, financial investors including Piramal Enterprises Ltd-Bain Capital Credit platform, AION Capital, Oaktree Capital and Lone Star Funds have expressed interest in Bhushan Steel.
“I think forensics should be done only when there is a reason for it. If the audit throws up serious concerns, the promoters should be debarred from bidding under the restructuring plan. I don’t see delay as a concern as there is sufficient time available for the plan to be sanctioned. In fact, a good forensic audit may actually help attract enhanced bids for the asset," said Ramesh Vaidyanathan, founder & managing partner of law firm Advaya Legal.