Bhushan breakthrough

After innumerable twists, turns and dead-ends, India’s new Insolvency and Bankruptcy Code may have yielded its first significant success, with the National Company Law Tribunal (NCLT) approving Tata Steel’s winning bid to acquire the distressed Bhushan Steel for ₹36,400 crore. The denouement in its case has been better than expected because the deal entails a less than 30 per cent haircut for financial creditors and allows them to recover many times the liquidation value. Public sector banks (PSBs) will get a much-needed breather from this deal, with a ₹35,000-crore reduction in non-performing assets (NPAs) and ₹7,500 crore in write-backs to shore up their bottom-lines. One therefore hopes that the deal manages to navigate the pending hearings before the Appellate Tribunal from Bhushan Steel’s promoter and L&T, an operational creditor.

But the Bhushan Steel case offers no grounds for complacency about the scores of other cases before the NCLT. Bhushan Steel attracted enthusiastic bidding because its value-added steel capacities are particularly sought-after, amid the global upswing in the steel cycle. It is unlikely that bidders will similarly throng to the smaller steelmakers or beleaguered firms in sectors such as infrastructure/EPC, power generation or ship-building, which account for a third of the NCLT cases. These sectors are plagued by over-capacity and there aren’t too many viable domestic players to bid for distressed assets. In a recent analysis, CLSA pointed out that the haircuts on some of these non-steel assets could be as high as 75-80 per cent. This would mean further blood-letting for PSBs, whose financials are already in a parlous state. This puts the Centre in a quandary because, after its ₹2.11 lakh-crore recapitalisation largesse, it can ill-afford to spend further taxpayer money on shoring up PSBs’ perpetually short capital adequacy ratios.

So policymakers must ensure that the remaining cases at NCLT attract the widest possible range of bidders. Going by the experience so far, this may call for at least a couple of tweaks to the current bidding process. One, while the IBC is quite right to bar promoters or wilful defaulters from bidding, the qualification criteria must not be set so tight that it rules out other healthy players. On this count, perhaps the code can take a more liberal view on ‘connected persons’ bidding for assets. Two, in the Essar Steel and Bhushan Power cases, lucrative bidders have submitted their offers after the expiry of the initial deadlines leading to legal tangles. A shift from closed bidding to a competitive open auction system may not just obviate the need for multiple rounds of bidding, but also ensure fierce competition among bidders, thus maximising gain for lenders.

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