Tata Steel's Bhushan Steel acquisition hits NCLAT hurdle, may get costlier

A Bhushan Steel plant in Odisha
Tata Steel’s acquisition of Bhushan Steel may hit a hurdle as the National Company Law Appellate Tribunal (NCLAT) will re-examine Tata Steel’s eligibility as a bidder. Besides, the NCLAT has also admitted a petition by operational creditor, Larsen & Toubro (L&T) which has sought Rs 9 billion from Bhushan Steel.

If the NCLAT or the Supreme Court when appealed, gives any order which goes against Tata’s acquisition, then it could mean increased acquisition cost for Tata Steel which has already paid Rs 352 billion to the banks, said lawyers. 

When contacted, a Tata Steel spokesperson declined to comment.

In May this year, the NCLT (National Company Law Tribunal) had approved the Tata Steel resolution plan and the Tata company had moved in to take over the unit from the erstwhile promoters Neeraj Singal and family, who had immediately moved the appellate tribunal, as per the procedure. Bhushan Steel was sent to the NCLT under the Insolvency and Bankruptcy Code (IBC) after the company failed to repay its loans worth Rs 480 billion. The lenders took 36 per cent hair cut in the Tata Steel transaction.

But on Tuesday, following a petition from the Singal family, the NCLAT asked why Tata Steel was eligible to bid for the company under section 29A of the IBC, which debars bidders for several reasons including being close relatives of promoters or those who have defaulted on bank loans in the past. 

The Singal family had also contested the cancellation of the power purchase agreement signed by Bhushan Steel with Bhushan Energy which is also facing IBC proceedings.  The PPA was valid till 2024 and Tata was again the only bidder for Bhushan Energy.

Tata Steel had promised to pay Rs 12 billion to the operational creditors of Bhushan Steel over the next one year but did not mention the proportion in which it would be distributed. “The last word has still not been said on this transaction,” said a Mumbai-based corporate lawyer. 

The NCLAT will hear the matter again on July 26. “The Singal family has the option to appeal to Supreme Court – if they do not get a favourable order from the NCLAT,” said the lawyer.

The L&T petition is another dampener for the deal. Companies and private equity funds, which have won or plan to bid for stressed assets, say that the admission of L&T's petition asking Tata Steel to cough up the dues as they are not operational creditors but asset creators could open a Pandora’s box and discourage bidders. "The NCLAT has already admitted L&T’s petition. If it rules in favour of L&T, then it will open all other cases as post NCLAT order, an operational creditor will go the court any time later and ask for the money,” said the head of a private equity firm.

“In these circumstances, if a bidder, which has won the company based on certain assumptions to make the deal viable, will have to re-calculate the entire bid which would discourage others to make a bid,” said he. The L&T issue is a serious one as even if it loses in NCLAT, it will appeal in the Supreme Court. Till a final decision is not taken, it means the transaction is still open and the final resolution has no value as the winner will have to pay more,” said he. 

Another corporate lawyer said, “The first paragraph of IBC 2016 says that the resolution plan must take care of all the stakeholders, but the resolution professional has not accorded any value to the operational creditors and has only looked after the interests of the lenders.” Besides, operational creditors, employees and of course suppliers that have legally valid agreements cannot be ignored, he added.

No Clarity
  • June 2017: RBI sends Bhushan Steel to NCLT for debt resolution
  • March 2018: L&T moves NCLT for recovery of its Rs 9 bn dues
  • May 2018:  NCLT clears Tata Steel acquisition
  • May 2018: Singal family moves NCLAT against Tata Steel acquisition

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