IBC: What It Takes To Become A Suitable Bidder
- The world’s largest steelmaker ArcelorMittal exited its substantial, long-standing India investment in Uttam Galva Steels Ltd. at a steep loss.
- The Ruias have cobbled together a special purpose vehicle—Numetal Mauritius—that has Rewant Ruia, the youngest of the Ruia siblings, tucked away in somewhere deep.
- And Seema Jajodia de-promoterised herself to give brother Sajjan Jindal’s JSW Steel Ltd. a fair shot at her family-owned steel company Monnet Ispat.
All this so that each of these bidders can sidestep the ineligibility criteria recently added to the Insolvency and Bankruptcy Code 2016.
While there is no confirmation yet that they will succeed, or fail, it’s interesting to examine the contortions each is going through. Before that, here’s an attempt to explain the key ineligibility criteria that threaten the bidders’ ability to bid for assets under insolvency proceedings.
An entity, say ABC, cannot make a resolution application if it...
- is an undischarged insolvent.
- is a wilful defaulter.
- has an account classified as non-performing asset for at least one year before the insolvency process began (not applicable if overdues cleared).
- is a promoter, or is in management or control, of an account of a corporate debtor that has been classified as non-performing asset for at least one year before the insolvency process began (not applicable if overdues cleared).
(There are other ineligibility criteria but they are not pertinent to these cases hence not mentioned here.)
Furthermore, if any person, say XYZ, acting jointly or in concert with ABC meets any of the above listed criteria, then too ABC stands disqualified.
And if ABC is connected to, say OPQ, and OPQ meets any of these criteria, then too ABC stands ineligible.
According to the IBC definition, ABC would be connected to OPQ if OPQ is:
- the promoter of ABC or in the management or control of it.
- a person who shall be the promoter or in management or control of the business of the corporate debtor during the implementation of the resolution plan.
- the holding company, subsidiary company, associate company or related party of either of the two above.
Arcelor Mittal Does Exit-asan
In 2009, there was no curbing the share price of Uttam Galva Steels Ltd. when it announced that the world’s largest steelmaker ArcelorMittal BV intended to acquire an over 30 percent stake in the Indian company and sign a co-promoter agreement. The acquisition cost approximately Rs 500 crore. Last week, Arcelor Mittal suddenly exited Uttam Galva for the princely sum of Re 1 per share.
The hurried exit was mostly likely to avoid the ineligibility criteria in the IBC. Uttam Galva has been a non-performing asset for over a year now and as its co-promoter ArcelorMittal would have been hit by clause #4.
By exiting, ArcelorMittal now hopes to stand unencumbered and free to bid for any asset under IBC. It was one of two bidders for Essar Steel Ltd. earlier this week.
Let’s see how lenders and courts view it. Or will they take a dim view of the fact that ArcelorMittal was promoter of Uttam Galva when it was labelled NPA and hence continues to be ineligible?
Arcelor Mittal’s Comment
As we have previously said, we do not believe there is any legal basis under which ArcelorMittal would not be considered eligible to participate in the resolution process. ArcelorMittal was never the promoter of Uttam Galva. We had no board representation and no involvement in the management of the company even before selling our shareholding. ArcelorMittal is an internationally renowned, financially strong credit-worthy investor with an AA rating. We have invested successfully in many countries and developed a reputation for our ability to turn around distressed or underperforming assets.
Ruias Bend To Minority-asan
The Ruia family is the promoter group for the privately held, debt-laden, non-performing asset Essar Steel. Hence, it cannot bid for the company, currently in insolvency proceedings, as per clause #4.
And so it devised a Mauritius-based special purpose vehicle, Numetal, in which Rewant Ruia, son of Ravi Ruia, has but a minority stake. The majority is held by Russian bank VTB. Numetal has bid for Essar Steel.
The Ruias claim to have no promotership, no control, no management of Numetal.
Now check Numetal by all the main ineligibility clauses 1, 2, 3 and 4.
Not an indischarged insolvent or wilful defaulter.
Nor is it an account classified as NPA.
Nor is it a promoter or in management or control of a corporate debtor that is an NPA.
Now check Numetal by the connected person clauses. Replace ABC with Numetal and OPC with the Ruias so as to check its connectedness with the Ruia family.
The Ruias, thanks to Rewant’s minority position, are not promoter or in managment or control of Numetal.
Nor will the Ruias be promoter or in management or control of Essar Steel during the implementation of the resolution plan.
This puts the Ruias in the clear, or so they hope. The question is are there any side agreements or arrangements that allow them to regain control of Essar Steel after the resolution plan is implemented? If not, what do they gain by Rewant’s minority position?
Numetal is a fully eligible resolution applicant and has already submitted its plan for Essar Steel. Rewant Ruia holds an indirect minority interest in Numetal, but is neither its promoter, nor is he in management or control of Numetal. He will also not have any role in the management of Essar Steel. Accordingly, his indirect minority interest is of no relevance as regards eligibility of Numetal.
Jindal To Try Disassociation-asan
Sajjan Jindal-promoted JSW Steel has bid for three of the five steel assets on the IBC block. Monnet Ispat & Energy Ltd., Bhushan Steel Ltd. and Bhushan Power and Steel Ltd. It’s the only bidder for Monnet and hence may hope to have a high chance of success. Wait.
Filial connections may play spoiler. Sajjan Jindal’s sister Seema is the wife of Sanjay Jajodia, promoter of Monnet Ispat. Now there’s no denying that JSW Steel is a separate commercial entity and legitimate competitor in the industry, and yet some may argue it could be rendered ineligible.
Go back to the ABC, OPQ illustration and replace them with Sajjan Jindal and Seema Jajodia, respectively. As explained, if ABC is connected to, say OPQ, and OPQ meets any of the ineligibility criteria, then ABC too stands ineligible.
Seema Jajodia and Sajjan Jindal are “related parties”, making the two “connected” under the IBC.
Seema Jajodia is not eligible to bid for Monnet Ispat as she is one of the promoters of the NPA, violating clause #4. Will that will infect Jindal and JSW’s eligibility?
Jajodia attempted to remedy the situation in advance when in January she gifted away her Monnet Ispat shares and the company issued a statement on her behalf saying “she was not involved in the formation, management, and control of the company from inception and her classification of promoter was incidental to her minuscule holding in the company”.
Jajodia said “she has desired to be disassociated as or from promoter group of the company immediately”.
But will that be enough distance between Monnet, her, Jindal and JSW?
JSW Steel’s Comment
We believe that we are qualified resolution applicant as per provisions of IBC 2016 and the amendments thereto.
The next few weeks will reveal if these contortions help these promoters and their companies or leave them in knots.