Bhushan, Binani Challenges Show That Open Auction Ought To Be Part Of IBC Process

The Committee of Creditors (CoC) is expected to decide who is the winning bidder for Bhushan Power and Steel shortly after the Supreme Court declined Tata Steel’s petition to stay the rebids. In the earlier bid, Tata Steel’s offer of Rs 17,000 crore proved to be the best one against outstanding dues of over Rs 47,000 crore. The runner-up JSW Steel’s bid was far behind the Tata offer.

But Liberty House, which was about to offer a higher bid, entered the picture after the last date for bids ended, and lost out despite offering more to the creditors. Towards the end of last month, JSW Steel raised its bid above that of Tata Steel to Rs 18,000 crore. And the National Company Law Appellate Tribunal (NCLAT) vacated its earlier stay and ordered the CoC to consider all three bids – by the Tatas, JSW Steel and Liberty House.

The net result is that a bid that was won fairly by Tata Steel is up for a rebid after the losers went to the appellate and highest courts.

In the Binani Cement case, the losing bidder, UltraTech, raised its bid after losing out to Dalmia Bharat by a whisker. It is now involved in a legal challenge in order to emerge ultimate winner. The NCLAT will take a final call, with the CoC favouring UltraTech over Dalmia.

In theory, there is nothing wrong in this, since the basic idea is to improve recoveries for lenders. Banks will celebrate the fact that they may get more of their money back when there are counter-bids. By changing the rules midway, final offers could be much better than the tentative winning bids.

But this also means that bid rules are going to be left flexible – which is not a great idea.

If we are to move away from bids being followed by rebids after court tussles, the logical way to make it all above board is to enable auctions if the top bid is challenged or too low in the judgement of the CoC.

This is how it should work: let’s assume that the winning bid is not good enough, or someone wants to raise his bid after losing it, the CoC could announce that they have a tentative top bidder, but if anyone tops this bid, either through a formal offer or through participation in an auction process involving new and different bidders, they can do so.

This kind of shift to an open auction from a closed tendering process cannot be decided case-by-case or through court interventions. It should be burnt into the Insolvency and Bankruptcy Code itself in order to pass the test of fairness.