Barring some from bidding wouldn't hinder proper valuation: Seshagiri Rao

Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel
Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel, in an interview with Ishita Ayan Dutt explains how JSW came out of restructuring in 2004 on the current debate regarding restructuring and bidding for stressed entities and assets. Edited excerpts:

Is it a correct view that barring of promoters from bidding would bring down the valuation of assets? 

I don't agree that valuations would come down because one promoter is not there. There are a number of EOIs (Expressions of Interest, for bids) that have come from private equity funds, strategic investors and parties abroad. So, eligibility criteria barring certain parties who lack a (good) track record is not a big limitation in getting value for the asset. 

Should a distinction have been drawn between a wilful defaulter and promoters of all stressed assets?

We have been advocating the view that a wilful defaulter or non-cooperative promoter or anybody who diverted funds, once this is established through forensic audit, should be subject to certain conditions. As far as a blanket ban is concerned, we have to look at the conditions under which it (asset in question) has gone into stress.

Some promoters of steel companies have said the sector has gone through a rough patch due to extraneous factors and the promoters can’t be held responsible. Your response?

In the sector, there are companies doing well and others not doing well. They operate in the same business environment. If the operating and business conditions are same, why are some companies in deep financial distress and some not? 

Promoters of stressed steel firms are saying  there are only two healthy ones, Tata Steel and JSW. And, Tata Steel has captive mines and JSW was already restructured in early 2000.

After liberalisation, many companies in the private sector invested a huge amount of money in the steel sector and created capacity. All of these came together at the same time, coinciding with global issues like a currency crisis, Russia disintegration, the nuclear test in India. That had created some stress in the sector. 

Yes, restructuring was done for JSW. But, in 2004, we came out of it, with the right of recompense fully to the lenders. That is the point we are highlighting. If an existing promoter hasn’t done well, there are frameworks within which restructuring could have been done, as we did. Our restructuring was in 2002. We came out of it in exactly two and a half years. We wrote down promoters’ equity to 40 per cent. Our lenders converted debt into equity to the extent of 40 per cent. Twenty per cent was held by the public. 

In 2004, when we wanted to come out of CDR (corporate debt restructuring), whatever losses were there on account of restructuring were fully compensated. After that, we have never allowed the company to be in stress. We were 1.6 million tonnes (mt) then; today, our (annual) capacity is 18 mt. 

With the amendment (proposed to bar promoters with a bad record from bidding), the process could get delayed?

It (an agreed resolution process) might not happen in 180 days and might get extended by another 90 days (as present law allows). In each of the cases, there are nine or 10 applicants. If you give each 10 days to prove their proposal is valid, it will not stretch beyond 270 days. 

The IBC (the law in question) had provided for liquidation value but lenders are now insisting on enterprise valuation. What do you think, as a prospective bidder?

I am not able to understand this concept at all. Whoever is the bidder will work it out and give a bid based on a going concern. How the value will be calculated, is it asset-based, market multiple-based or  discounted cash flow will depend on whatever synergies the new investor can bring to the table. To determine if that valuation is okay or not with the lender, he should have some guiding value with him. For that, if he wants to have a valuation, it is only a guiding principle to take a call. It is no way a guidance for the prospective bidder. 

The rationale is that bids below the enterprise value are not accepted and there is no distress sale. Is that a fair assessment?

A long process had been put in place for these companies for several months, if not years. They tried their best to fit these in either SDR or S4A or 5/25 (all previous schemes tried for restructuring of overly indebted firms). All that must have been done after knowing the value of the company. So, this must be with the lenders. Maybe they are asking this because the IBC provides that the IRP (insolvency resolution professional, appointed by the tribunal for the purpose) has to give a liquidation value in the information memorandum when they are asking for bids. Instead of that, they might be seeking an amendment to the IBC that the going concern value should be given in the information memorandum, not the liquidation value. 

Any possibility that the companies (stressed ones in the sector, subject to IBC) could go into liquidation?

There are a few things. Who the resolution applicant is might be put to rest with this ordinance. Whether that is correct or not correct we could continue to debate. A second issue is how lenders evaluate the bids. We are saying there should be uniform norms for all the accounts. If the evaluation process is not uniform and transparent, there would be a problem. 

Third, implementation of the scheme. There are several issues here — either amendment to the income tax rules, Sebi, Stamp Act, mining law or a clarification that schemes approved under IBC will have precedence over other law. If that is not there, there are additional liabilities coming in. That will be factored in by the prospective bidder. Also, there will be delay. Particularly, with competition law approvals. Unless a successful bidder is declared, it is not possible to approach the Competition Commission (CCI) for approval. That will be towards the end of this time-bound process. Without CCI approval, it is not possible to acquire.

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