Essar Steel: IBC Process Must Put A Full Stop To Spoiler Bids Like That Of The Ruias

The National Company Law Tribunal (NCLT) did the right thing by throwing out the Ruia bid to regain control of Essar Steel, the company in which they defaulted hugely on bank loans. This makes Arcelor Mittal the committee of creditors’ preferred suitor and runaway favourite to gain control of the company.

The Ruias may move the appellate tribunal (NCLAT) and then the Supreme Court, but it would be a pity if the latter gave them another chance to buy their company back. The Ruias have no moral right to reclaim a company they ran into the ground financially.

The Ruias think they stand a chance because they have offered Rs 54,389 crore to buy back Essar Steel while the Arcelor Mittal offer is for Rs 42,000 crore, and it does not sufficiently compensate operational creditors. So, going by the Supreme Court verdict in the Binani Cement case, where maximising value was declared to be the overarching goal under the Insolvency and Bankruptcy Code (IBC), the Ruias can claim that they still ought to be given a chance.

However, this is hardly the full picture. The Mittals have additionally offered to inject another Rs 8,000 crore in the company. Besides, Arcelor Mittal also cleared Rs 7,469 crore of dues owed on behalf of two companies they were associated with - Uttam Galva and Petron – in order to bid for Essar Steel. So, from the point of view of the lenders, the recovery is much more than just the Rs 42,000 crore that Arcelor Mittal has bid for Essar.

But the strongest reason to blackball the Ruia bid is that theirs was a spoiler bid – a bid announced long after the insolvency process was underway, and intended merely to spike the guns of Arcelor Mittal. You cannot enter the game when it is about to end and score a goal from the sidelines. If the Ruias had wanted to pay up, they could have done so well before the case was referred to the bankruptcy courts. Even after the resolution process was started, they tried a backdoor entry through Numetal. And when this did not work, they offered a final bid only after Arcelor Mittal had more or less emerged as the likely winner. This does not speak well of Ruia intentions.

A third point comes out indirectly: if the Ruias can today rustle up Rs 54,349 crore, when the resolution process is nearing its end, it means that they always had the ability to repay banks, but took their chances with default in the hope of forcing banks to take a haircut and then buying back their company on the cheap. This is no different from wilful default.

Promoters who want to play such games with lenders need to be given a strong message. The crony era of a wink-and-a-nod relationship between bankers and borrowers, with bankers carrying the can and promoters the real booty, must be formally shuttered. It was the reason why the government inserted section 29A in the IBC, to deter promoters with large defaults from reclaiming their companies for a song after a large part of the loans are written off.

The insolvency process is supposed to close in 180 days, with another 90 days being given in difficult cases. But the Essar case has been going on for more than 550 days, and the process has been prolonged by the Ruias’ spoiler bid. It is this bid that must be firmly squashed.

There have been spoiler bids, or bids given as an after-thought, in other cases too.

In Bhushan Power, where the Tatas emerged as the highest bidder in February 2018, Liberty House took the matter to court even though the last date for bids had closed. In the next round of bids, JSW Steel made the highest bid, and the Tatas have taken the matter to court. Liberty has given up. JSW effectively ousted the original spoiler bidder and became one itself. A process that should have ended 10 months ago is now still stuck in the legal coils of the IBC process. Even if we think the JSW bid is better, who can deny that the delay is costing money too? In the Essar case, banks are losing Rs 17 crore a day and SBI even offered its entire loan at a discount to get its money out. If the Ruias keep dragging the case endlessly, banks will be the losers.

On the other hand, Liberty House has been unable to consummate the bids it did win – Amtek Auto and Adhunik Metals. This has led lenders to wonder whether Liberty is a reliable participant in the resolution process. The company’s bid to participate in the resolution process for ABG Shipyard has been blocked by lenders.

In the case of Binani Cement, the Ultratech bid was slightly lower than the winning bid by Dalmia Bharat, but Ultratech wanted the company badly and upped its offer. It wasn’t a spoiler bid, but it did vitiate the bidding process by reopening a bid that was already won by another party. While the Supreme Court finally ruled in Ultratech’s favour, saying maximisation of value was the prime goal of the IBC process, the decision could encourage more spoiler bids. The Ruias will be hoping that the highest court will now allow their bid in the same way they did Ultratech.

The success of the IBC process in future will depend on three things.

One is to put legal limits to how long the resolution process can take, including legal challenges. If the days taken up by legal challenges are kept out of the 270-day limit, businessmen will try every trick in the book to take the process for a ride. This is how the Essar and Bhushan cases have dragged on beyond 500 days and are still to find resolution. The real target must be the 180-day limit, with 270 being the outer limit that should include legal delays. This limit should be hardcoded into the IBC law.

Two, spoiler bids must be blocked at the point of entry. And late bids, for whatever reason, should generally be disallowed except for specific reasons that are truly above board. A bidder who never entered the picture in the first round should not gain a backdoor entry after hearing about how the first round of bidding went. This rule will probably allow an Ultratech to squeeze through, but not the Ruias and Liberty House. In the case of close bids, the lenders should have the option of negotiating with both bidders to arrive at a higher price, if needed through a transparent auction. A rule can be framed whereby two or more bids that are less than 10 per cent away from one another can be a ground for a rebid or open auction.

Three, the NCLT, the appellate body and the Supreme Court must impose costs on litigants. For any delay beyond 270 days, any litigant should be asked to compensate banks for every day of delay. The Ruias should be asked to compensate both the banks and Arcelor Mittal for the last three months of delays.

It is worth recalling that the banks supported Ultratech because the Birla company offered to compensate them for court delays. This must now be essential practice, and again hardcoded into the IBC law.

The IBC process has broken the assumption among businessmen that they can borrow endlessly, and then not pay for their sins or business follies. The Essar Steel case, if it finally forces the Ruias to eat crow, will reinforce this message as nothing else can.