As IBC Begins To Deliver, Modi Government Set To Win First Skirmish Against Crony Capital’s Defaults

Is the National Democratic Alliance (NDA) government’s run of bad luck with bad banks and bad loans about to turn? While the discovery of a Rs 11,400 crore fraud in the Punjab National Bank has only left red faces all around, it appears as if the Insolvency and Bankruptcy Code (IBC) is about to bring us good news.

From all accounts, the initial default cases involving steel, power and cement assets seem to be about to deliver in spades, thanks to a healthy combination of good assets and a favourable turn in the commodity cycle.

Tata Steel, which burnt its fingers by an over-the-top bid for Corus in the noughties just when the steel cycle was about to hit a speedbump, has surprised many by bidding hard for two Bhushan assets – Bhushan Steel and Bhushan Power and Steel. It has offered Rs 35,000 crore (plus 12 per cent equity) for the former, Rs 5,000 crore more than the next highest bidder, and Rs 24,500 crore for the latter (Rs 17,000 crore in cash to lenders, and the rest as cash infusion into the company), again at a hefty gap over the next bidder.

Against an accumulated debt of Rs 50,000 crore, Bhushan Steel, if sold for Rs 35,000 crore to the Tatas, will involve a haircut of only 30 per cent for lenders – which is way above what they may already have provided for in their balance sheets. This means their balance sheets will get a positive boost once the bid goes through. In the case of Bhushan Power, the haircut may be higher, about 40-50 per cent, given that banks are owed more than Rs 48,000 crore, but it’s still a lot better than what was earlier expected. Bhushan Steel has a five million tonne alloy steel unit, and Bhushan Power and Steel a 3.2 million tonne one, plus a 700 mw power plant. The bid for Bhushan Power may go up in final negotiations with banks, since one more bid – from UK-based Liberty House – is coming up. Liberty missed the deadline for bids, but banks could opt to reopen the bids in case the Tata deal is not sweetened.

In cement, Binani Cement is likely to go under the hammer for a little over Rs 6,300 crore, with Dalmia Bharat being the top bidder, and Ultratech just a whisker behind. While the promoter has yelled blue murder, claiming this is far below the real value of the firm, which it says is worth over Rs 17,300 crore (including mining rights), bankers are likely to go with the cash that is being offered upfront rather than listen to promoters trying to delay or spike the deal claiming low valuations. For bankers, a bird in hand is always worth two in the bush.

There is still some confusion over whether another steel company that went bankrupt – Essar Steel – will get delayed bids, since both bidders – Arcelor Mittal and Numetal, in which the Ruias of Essar have a small stake, have been deemed ineligible to bid under the amended IBC law. The law bars businessmen with existing investments in defaulting companies from participating in IBC processes. However, Mittal is only a small shareholder in Uttam Galva, another steel company now into bankruptcy proceedings, and even this may be up for divestment. So, Essar Steel will indeed get a good bid at some time this year, perhaps in the second quarter.

If all the major defaulting companies that were in the first lot to be referred to the National Company Law Tribunal get sold at reasonable prices, it will be the first major success for the Narendra Modi government on bad loans.

The companies mentioned above could end up giving the banks cash to the tune of Rs 75,000-100,000 crore – and huge profit-and-loss account relief at a time of serious financial crisis. It will prevent a further deterioration in profits, and, in some cases, actually help bump up profits where haircuts are lower than provisions.

The Modi government is about to collect its first political and economic payoff from its bold decision to send thousands of crores worth of bad loans to the IBC. A combination of good assets and bad balance sheets, which sent these companies to bankruptcy, has been rescued by a small turn in the commodity cycle and excellent performance by the bankruptcy courts, which have refused to delay settlements despite efforts to do so. This suggests that the system is turning a deaf ear to crony capitalists who usually get away with murder by using systemic delays. This is a qualitative change in the fight against crony capitalism.

Fortune is favouring a brave government.