Insolvency process: Key challenges explained by Abizer Diwanji, EY-India

Anuj: But that is a textbook definition.

A: That is the reality also.

Anuj: Is the reality as well for example for Amtek Auto?

A: It will be for anybody. I will explain to you in brief. Anybody including a promoter would want to preserve value because almost every promoter has given a personal guarantee. Whatever overflows as a non-recovery out of an IBC process will actually still remain as an onus to the promoter in terms of his guarantee. So, clearly it is very important for any promoter, in any of these 12 cases to make sure that they retain value, collaborate with an IP or the bankers or anybody else.

I think everybody is on the same side of the table as far as the IBC process is concerned. Now, what will happen, the conflict is that when the resolution plans come on the table within 180 or 270 days, that is when a promoter will also bid for his own assets and that is where I think the promoter will move to the other side of the table so to say because he will also want to bid for those assets along with external bidders.

Surabhi: He also will then in that case have to cough up capital.

A: Absolutely, so, at the end of the day the promoter now is in par with any other external person who will have the same level of information which an IP will facilitate to bid for a company. However, the reality is in the interim period, both will try to preserve value because unless value is preserved, the net delta will always fall into a promoter because of his personal guarantees.

Anuj: The reason I asked that question is because we heard news reports that for example, Motherson Sumi is looking at Amtek Auto\'s couple of plants and there are 12 bidders for some of these assets. Some of these are nice assets. In general, you would want promoters to avoid that bankruptcy tag. So, could we have a situation where there is some value for some of these companies?

A: First of all, what is this bankruptcy tag. There are two processes to this bankruptcy code. One is on day one the promoter is not bankrupt. He is into administration i.e. insolvency. During their 180 day period, the plants are valid, just that the debt has to be right sized, equity zero I am presuming, the debt has to be the right size for somebody to come and bid for the assets. As you said, some are attractive, but they are attractive at the right debt levels. And that is what the IBC process will achieve. After the assets, these attractive assets at the right price are actually palmed out, that is when you start creating equity value.

Surabhi: The market is obviously grappling with how to understand this because it is the first time we are getting to something like this. Stock prices have gone completely haywire. They swing from 20 percent up to 20 percent down on any given day. Help us understand this because you are saying that as of now, in reality, equity should be considered zero. So in which case, what sort of options will start coming on the table and how should we value equity for these IBC cases?

A: The expectation of the market is that there will be a haircut in some of these. The equity will get taken over by somebody more credible which could be the promoter tying up with a financier or an outright bidder and that will create minority shareholder value. That is really where the markets are headed and that is where the markets are guessing.

Now, of course, somebody in the earlier session raised the issue as to where is the capital to actually write down some of these laws. That is the reality and that is where the uncertainty comes into the system that while a few banks will be able to take the write off, most banks will not be able to take the write offs. So where will this come? Will this ultimately lead to a liquidation which is a possibility?

Surabhi: What is the chance of that, that was my question? So an absolute downright asset stripping versus actually getting in new buyers whether it is the promoter or a new person coming in and buying out the company?

A: There are deals where we will certainly have buyers, as you have rightly said, some plants of Amtek Auto or currently GTL for example, the telecom towers company is outright for sale. Now that is going to be an equity value deal. But those are different transactions. Some other plants, power plant cost is Rs 8 crore per megawatt, they will not be a buyer.

Reema: This is a time bound process which has to take place. At what stage are we right now in all the 12 deals, as per your understanding?

A: Frankly, most of them we are about to file. We have not even filed.

Reema: In the National Company Law Tribunal (NCLT) courts?

A: I do not think under the RBI directive, not a single application has yet been filed for the 12 except for, I think Standard Chartered got filed but it got filed outside of the RBI process. It got filed by somebody else. Standard Chartered filed it for Essar. Apart from that, the filing process is yet to start. What has happened is that the consultant, the IP appointments have been shortlisted. But the filings are yet to happen.

Anuj: The NCLT decision can only be challenged in the Supreme Court, right?

A: National Company Law Appellate Tribunal (NCLAT) decision can only be challenged in the Supreme Court and that will be after the 14-day.

Anuj: The sense I got was that most likely Supreme Court will just accept the decision and dismiss the petition.

A: NCLT decisions are primarily based on whether a default has occurred or not. That is the only thing that they are checking really while admitting a petition. I think that is a matter of fact. More or less NCLT decisions are taken in unless promoters, we had initial promoters kind of questioning constitutional validity of IBC and all that, that is all sorted out.