As the resolution deadline for some of the big distressed cases draws near, a few are heading towards closure but others are stuck. The Insolvency and Bankruptcy Code, touted as one of the great reforms of recent years, cannot succeed if cases are delayed or stuck because of different interpretations of the law. If cases become stuck in litigation and scare away potential buyers for assets yet to enter the process, it will destroy confidence in the fledgling resolution framework. The government has to act quickly to remedy the situation and amend the code to ensure more clarity on who can bid and who cannot.
In the next two months, the 270-day deadline for the resolution process expires for 11 of the 12 big cases referred by the Reserve Bank of India for early resolution. But in at least four cases, the chances of meeting the deadline appears slim as they are either stuck in litigation or got delayed because of legal issues. Of course, lenders will be able to get some money after they are forced into liquidation, but that is not the optimal solution.
In two of these cases, the delay (or likely delay) is a direct fallout of the amendment to the code that wants to bar fraudulent or defaulter promoters and their related entities from bidding. The amendment had a long list of disqualifications including loan defaulters, people convicted for offences punishable with imprisonment for at least two years, people who have been barred by regulators in India and abroad from accessing markets etc. When one includes all entities connected with them, the list of exclusions is rather wide. It has become a fertile ground for litigation as bidders come out with reasons to show competitors are ineligible.
The high profile case here is Essar Steel Ltd where lenders are hoping to claw back as much as $6 billion. The eligibility of both its bidders is under a cloud because of their perceived connections with defaulters. NuMetal Ltd has bid in a consortium that includes an entity controlled by a trust that has Rewant Ruia, son of Ravi Ruia, as a beneficiary. VTB, the largest shareholder in NuMetal, has said that is willing to drop the Ruia trust and would go to court if its bid was disqualified. It has also said that cases and judgements in other jurisdictions related to VTB won’t disqualify its bids.
Similarly, ArcelorMittal had a 29% stake in Uttam Galva, another defaulter, while its chairman L.N. Mittal held a 33% indirect stake in another defaulter entity KSS Petron. Both these stakes had been sold off before the steel giant bid for Essar, which ArcelorMittal believes is sufficient to ensure its eligibility .
In its current avatar, the law does not specify whether past associations are relevant for deciding eligibility, but this could very well be grounds for litigation depending on how the committee of creditors, that takes the final call on bids, chooses to view this.
In the case of Electrosteel Steels Ltd, Abhishek Dalmia led Renaissance Steel has appealed to the tribunal questioning the eligibility of Tata Steel and Vedanta. Renaissance has alleged that some overseas subsidiaries (or officials) of these firms were convicted.
A ruling on these firms’ eligibility is crucial because it will set a precedent. An adverse ruling may be used to block the company from bidding for other assets as well.
When the code was amended, its supposed intent was to prevent repeat offenders and fraudsters from ending up as owners of distressed assets. The government also did not want to be seen as supporting crony capitalism even if it came at the cost of depressing bid values.
While the intent is honourable, the way the law has been drafted may well prevent genuine bidders from owning distressed assets because of these technicalities. If the committee of creditors, or resolution professional takes a call on interpreting the intent of the code, then they may well be dragged to court as the Electrosteel example shows.
In any case, they should not be called upon to make such interpretations. The law should be clear enough and the creditor panel should weigh a resolution bid on its commercial merits.
Although it is only two months since the code has been amended, it is time to tweak it to ensure that genuine bidders aren’t shut out. For example, the code should clearly specify whether past associations with disqualified entities are relevant and for how long. Another could be to clearly specify what kinds of relationships are relevant instead of an all-encompassing definition of related parties and connected parties.
It is all very well to say that these are teething troubles for the code and that it will evolve. But when these problems are glaringly evident—and especially in the first set of big cases accounting for a quarter of bad bank loans—there is no need to wait for more to pile up before taking action. It is essential that these changes are brought about quickly to build confidence in the system.
Ravi Krishnan is assistant managing editor, Mint.