February 1, 2018

Banks, expected to take haircuts of 60% at least on their loans, want to protect their interest even after a new owner comes in

Bidders for assets of companies undergoing insolvency proceedings face up to a five-year lock-in for the shares they acquire. Lending banks are insisting on this to deter sales of the assets by the new promoter at a profit within months of the takeover.

“It is a good strategy that the applicant’s shares held in the restructured company be locked in for a reasonable period of time. This will provide comfort to creditors who have agreed to take a haircut in an attempt to revive the struggling company,” said Sumit Binani, a resolution professional.

According to a source close to the development, bidders have already been informed that if they bag assets being auctioned under the Insolvency and Bankruptcy Code, they will not be able to sell shares or any other assets of the acquired companies unless cleared by the lenders.  Banks, expected to take haircuts of 60 per cent at least on their loans, want to protect their interest even after a new owner comes in. “We are issuing a different lock-in period with each asset. There is no specific guideline in the Insolvency and Bankruptcy Code on lock-in of shares,” a banker said.

“It is only fair that the shares are locked in till the loan is paid. Otherwise the resolution proposed by the investor may be in jeopardy,” said another source.  

A lock-in period could affect plans of private equity (PE) firms that are bidding for struggling companies in order to turn them around and sell them later at a profit. “If a PE firm wants to induct an equity partner, it will be difficult,” said a bidder.

The clause will not affect other bidders like JSW Steel, Vedanta and ArcelorMittal because they plan to remain invested for a long time.  

JSW Steel has tied up with Japanese steel major JFE and the Piramal group to bid for Bhushan Steel. It is also bidding alone for Bhushan Power and has won the race to acquire Monnet Ispat.
Cash-rich Vedanta has won the race to buy Electrosteel Steels and is bidding for both the Bhushan assets.

Some bidders are worried about the change in rules mid-way. “Every day something new is coming up, which is confusing. Today media reports said lenders would negotiate only with the highest bidder and this was not there earlier,” said Seshagiri Rao, joint managing director of JSW Steel.

Over 4,300 insolvency cases have been filed, of which 470 have been admitted to the National Company Law Tribunal. But the buyer interest is concentrated on steel and cement companies, which have large capacities across India.

[The Business Standard]