Life after debt: Insolvency in motion

Private equity firms, asset reconstruction companies and the promoters themselves are the ones likely to play a leading role in the insolvency resolution process

After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.

g_102697_insolvency_280x210.jpgIllustation: Sameer Pawar
In early January, news of Anil Agarwal-backed Vedanta Resources emerging as a bidder for debt-laden Electrosteel Steels sent the latter’s stock soaring. While Vedanta wasn’t the only bidder—Edelweiss Asset Reconstruction Company, Tata Steel and Abhishek Dalmia-promoted Renaissance Steel were also in the fray—the process marked the beginning of proceedings under the Insolvency and Bankruptcy Code (IBC).

If the Electrosteel bid goes ahead (the insolvency professional could still reject the bids) it would be the first time an Indian company is sold after ousting the promoters and the lenders taking a significant haircut on the ₹10,000 crore (₹13,000 crore with interest) loan due. The Economic Times reported Vedanta’s ₹4,500 crore bid as the highest. While the RBI has released two lists of companies that would go through the insolvency route Forbes India looks at three possible scenarios.

First, the promoters after paying off the interest on the outstanding loan emerge as winners of the bid. This allows them to restructure their dues to suppliers and emerge with a leaner and fitter balance sheet but with a shrunken business. Take for instance SunEdison, which emerged from bankruptcy in January after selling $2.3 billion in assets mainly to Brookfield Asset Management. The smaller SunEdison extinguished the stock held by common stock holders and is now a private company. Similarly, equity holders in Indian companies could also see their holdings diluted. Market regulator Sebi is yet to issue specific rules in this regard and it is likely that the rights of small shareholders will be protected.

Second, private equity funds put in bids for assets that are available at a discount. They typically have a team that takes over management, turns the asset around and preps it for an eventual sale. Again, in January, Brookfield Asset Management entered the nuclear power sector with its purchase of the bankrupt Westinghouse Electric Company for $4.6 billion. The deal was Brookfield’s biggest ever. In addition to private equity funds there are also vulture funds that take over companies at a steep discount (at times 80-90 percent) and then strip assets and sell them on a piecemeal basis.

Third, there are asset reconstruction companies (ARCs), which in the Indian context could have a significant role to play. They’d be particularly relevant for companies where the banks are sceptical about attracting quality bids. In such a situation, banks could either sell these loans to an ARC in exchange for 15 percent of the consideration or they could initiate insolvency proceedings at the National Company Law Tribunal.

(This story appears in the 02 February, 2018 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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