Banks plan to set an internal benchmark below which they will not sell distressed companies that are in the midst of corporate insolvency and resolution proceedings, in a move aimed at deflecting concerns of the kind raised over the liquidation value of Videocon Group, two persons with knowledge of the matter said.
This was discussed informally by lenders at a meeting called to discuss the code of conduct released by the Insolvency and Bankruptcy Board of India (IBBI), the persons said on condition of anonymity.
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The benchmark will be based on the fair value and liquidation value of distressed companies evaluated by the valuer appointed by creditors. The lenders' valuation would be independent of that undertaken by the resolution professional, said one of the persons quoted above.
Lenders will aim to commission the valuation report after making an application to the National Company Law Tribunal (NCLT) but before it is admitted by the tribunal, the same person said.
The trigger for an internal benchmark was an observation made by the NCLT on the resolution plan offered by Twin Star Technologies, owned by billionaire Anil Agarwal, for Videocon Industries and 12 group companies.
NCLT raised questions on the confidentiality of the liquidation value of the 13 companies. The tribunal did not point fingers at anyone, but it did raise concerns over whether the liquidation value had been leaked.
"Surprisingly the resolution applicant (Twin Star Technologies) also valued all the assets and liabilities of all the 13 companies and arrived at almost the same value of the registered valuers," the NCLT observed.
The liquidation value was pegged at Rs 2,568.13 crore and Twin Star’s offer was Rs 2,962 crore, which is 4.15 per cent of total outstanding claims, according to the court order.
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In the same ruling, NCLT directed IBBI to ensure that a “confidentiality clause is followed…IBBI can frame appropriate regulations, safeguards there by the maximisation of value of the assets of the corporate debtor(s) would further increase which in turn will benefit all the stakeholders.”
Will it work?
Debt resolution experts do not think that setting an internal benchmark can help improve recovery.
“Notional liquidation value may not have much meaning. The quality of assets and cash flows will determine the offers lenders get” under the corporate insolvency and resolution process, or CIRP, said R K Bansal, chief executive officer of Edelweiss Asset Reconstruction Company.
“Typical old manufacturing businesses are referred to NCLT, here lenders will get attractive offers only if those assets give buyers a business opportunity or attractive cash flow. Otherwise, lenders will have to accept the reality that they can recover only to the extent there is value in the company,” he added.
Lenders are of the view that the benchmark value can serve as the new floor below which they will not accept any offer. Most lenders feel that the liquidation value is marked down sharply even when they have realisable securities against the loan, said a lender in charge of a stressed asset portfolio.
At present, the liquidation and fair value is the average of valuation by two independent valuers appointed by the resolution professional. The average liquidation value invariably serves as a floor below which lenders do not accept any offers.
Theoretical versus market-driven
“There is an issue with the valuation methodology used currently, but the question is will it change the recovery in a given case? The liquidation value ultimately is theoretical while the offers received through the insolvency process are market-driven," says Nikhil Shah, CEO of Alvarez & Marsal, a turnaround specialist.
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“My recommendation would be to address the key issues affecting the value including increasing the operational cash flows of the corporate debtor and running a competitive sale process where potential investors are well informed of the assets being sold. These are key skill sets that financial creditors should seek when determining the insolvency professionals they engage to drive a better outcome,” he added.
After facing a backslash for allegedly selling Videocon Industries at a throwaway price, lenders approached the National Company Law Appellate Tribunal (NCLAT) with a plea to restart the resolution process of the group in the larger public interest, according to a PTI report on September 20.
Of the 4,541 corporate insolvency and resolution processes initiated since the Insolvency and Bankruptcy Code was enacted in 2016, 1,349 went into liquidation, 396 cases ended in approval of the resolution plan and 461 have been withdrawn, 653 were closed on appeal or settlement, according to data provided by IBBI until June 30, 2021.
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