Promoters of stressed companies may challenge IBC tweak in court

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Promoters of the 12 companies that have been referred to the insolvency court will not be able to bid for their companies as the loan accounts have been classified as non-performing assets for over a year, according to the ordinance amending the Insolvency and Bankruptcy Code (IBC). 

Prior to the ordinance, the IBC did not specifically disallow these promoters from bidding for their companies. 

This move will specifically impact the Ruias of the Essar group, Singal brothers of Bhushan Steel and Bhushan Power & Steel, who were interested in bidding for their firms. Jaiprakash Associates, which had tied up with JSW group to bid for Jaypee Infratech, too will not be able to bid. Lawyers said some promoters may move court against the ordinance that bars promoters of companies that have non-performing assets for a year from bidding for their firms facing insolvency proceedings.

Promoters of steel companies said they ended up making losses because of external factors like withdrawal of gas supply and lack of environmental clearances. The Essar group’s supply chain was disrupted after Naxals in Chhattisgarh blew up its iron ore slurry pipeline a few years ago.

“The world over, there is no instance of banning a promoter when almost the entire sector had gone bad. The Indian steel industry in the last three or four years has gone through a bad phase. The whole sector has gone bad. So it cannot be a reason to bar promoters from bidding,” said Neeraj Singal, vice-chairman, MD & CEO, Bhushan Steel.

“If promoters do not bid then the realisation (for banks) will be 10-15 per cent of the (company’s) value. They (the promoters) have put their lives into these companies and should be allowed to bid,” he added. 

The Singal brothers own Bhushan Steel and Bhushan Power & Steel, which owe banks nearly Rs 1,00,000 crore and have defaulted on their loans.

“The ordinance purports to disqualify a whole cross-section of people from making resolution applications under the IBC, which will reduce the pool of resolution applicants. This will, in turn, depress the value of the assets and cause a loss to the banking sector itself,” said the promoter of another steel company.

The Jaypee group was planning to bid for its real estate company, Jaypee Infratech, along with the JSW group, which has emerged as one of the top bidders for distressed steel companies. With the Ordinance, the Gaurs will be out of the race for Jaypee Infratech. The Jaypee Infratech case is also complicated because the Supreme Court is hearing a petition by buyers who have accused the company of failing to deliver apartments.

Sajjan Jindal, chairman of the JSW group, however, said promoters of distressed companies should be banned from bidding for them. “I am happy that the government is moving swiftly towards streamlining and bringing credibility and transparency in the IBC process. This will facilitate healthy competition in maximising value to lenders, which is in the public interest,” he said.

But others disagree. “The government should provide a level-playing field to everyone. If a forensic audit has not found any evidence of fund diversion from a company, and if the promoter is not indicted for any wrongdoing, then it is wrong to punish him,” said the CEO of a steel company.

“Indian steel companies suffered due to cheap Chinese imports. It was only after the government imposed an anti-dumping duty on Chinese steel that Indian steel companies have started showing signs of a turnaround. This should be kept in mind,” he added.

A partner with a large corporate law firm said the provision in the ordinance about the exclusion of a certain class of persons from bidding could be challenged in court. A company’s debts may have become a non-performing asset due to factors beyond the control of its promoters. “Keeping such promoters away from bidding for the asset he or she created will be seen as unfair treatment,” said a Mumbai-based lawyer.

The promoters could move a writ petition in the high court or in the Supreme Court, said another lawyer.

Apart from steel companies, the Adani Power and Tata Power projects in Gujarat are making losses after the Indonesian government changed the duty on coal that is used as fuel by these companies. After the Supreme Court declined to provide relief to these companies, the government is planning to ask the Gujarat State Electricity Board to buy a 51 per cent stake in these companies.

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