The promoters forced by the banks or lenders to take their companies for bankruptcy under the new code may strike back by bidding a higher price than the bids by strategic players, distressed funds and private equity players. There could be attempts by promoters to bring in a fund along to help them retain the company facing bankruptcy.
This is the big fear among banks, which are now making a last ditch effort through the new bankruptcy code, to get their money back. There are already hundreds of companies facing bankruptcy which allows for a restructuring of operation or liquidation in a time bound 270 days. The RBI has recently referred the large 12 cases with debt of over Rs 5,000 crore. The RBI may refer more companies in future but the new code is open for any creditor or operational creditor to invoke bankruptcy in any company where more than Rs 1 lakh amount is due from the debtor.
As the bankruptcy code, which started with much fanfare, is getting tested, the promoters are aggressively strategising to retain their control. The bankruptcy code, when invoked, has a provision for keeping the promoters out during the bankruptcy period. The insolvency professional appointed by the Court manages the company in the interim and finds the best solution. But the code allows the existing promoters to bid for the company.
A banker on condition of anonymity said that in any distressed situation, the rule of thumb is that there is already a 40-50 per cent NPA provisioning by the lending banks. "The book value of that asset is almost half today. The distressed funds or strategic player would offer few basis points lower than the book value," says the banker. The banks fear that promoters would come with bid price much higher than the book value with longer repayment schedule.
Under the new code , the committee of creditors (CoC) decides the best offer and recommends the same to the court, the National Company Law Board ( NCLT) , which is the adjudicating authority. In the 12 large cases referred by the RBI, the existing promoters are also in the fray. For example, Ruias are also bidding for the Essar Steel which is facing bankruptcy proceedings. Ditto for others.
Experts suggest that the Indian promoters are known for not easily giving up their companies which they nurture as both owner and management. In fact, there is hardly any distinction between promoters and management. In the past, the SARFAESI, ARCs and DRTs were quite unsuccessful in resolving the bad asset problem. The recently introduced strategic debt restructuring (SDR) by RBI for throwing the promoters out by allowing lenders to take equity /management control was also a damp squib. Many want to wait for some large cases to resolve under the new code to see its effectiveness.
A CEO of a private sector bank recently hinted that they would look for the quality of debt or the people behind the new offer. " If someone is putting cash on the table , it is more valuable than somebody who is still expecting you to take debt," said the CEO.