A pedestrian walks past UltraTech Cement Ltd. warehouses near Cochin Port in Cochin, (Photographer: Dhiraj Singh/Bloomberg)

UltraTech-Binani Deal Will Test The Insolvency Process. That’s A Good Thing

The side deal between UltraTech Cement Ltd. and Binani Industries Ltd. for the latter’s cement arm will test the insolvency process. And that will help iron out wrinkles in India’s new bankruptcy law.

That’s the word from Rajat Sethi, partner at law firm S&R Associates. “The legislature has already included a provision which says that promoters are disqualified from bidding. Not only promoters but the persons acting in concert with the promoters. All those concepts are yet to be tested,” Sethi told BloombergQuint in an interview.

Yesterday, Binani Industries announced that it will apply to the National Company Law Tribunal seeking termination of the insolvency process that its cement arm is currently undergoing. That after the company entered into an agreement with Aditya Birla Group-owned UltraTech to sell 98.43 percent stake in Binani Cement for Rs 7,266 crore.

Provisions in the IBC currently does not support such a parallel deal even as an insolvency process is underway, Sethi said. “This looks like it will go all the way to the Supreme Court,” he added. And while that may slow down the current transaction, the it will “give rise to a precedent which can be used in future”, he said.

Watch the full interview with Rajat Sethi and Binani Industries Adviser Sameer Kaji.

Here are edited excerpts of the interview.

What are you trying to pull off? There is an insolvency process and you are going to strike a side deal. Are you dishonoring the insolvency process?

Sameer Kaji: Our main objective was to maximize value for all the stakeholders and to prove that there is an equity value also remaining after all legitimate and logical liabilities have been met with.

Unfortunately, we were never allowed to participate at the Committee of Creditor meetings. We were compelled to go to National Company Law Tribunal. In spite of all the options, the RP [resolution professional] went ahead and completed the bidding process from their end and made an application to the NCLT for the final approval or the nod. At this stage, we had no option. Out legal advisors told us that the only option we have now is to enter into a tie-up. We had an option to go to A, B, C, but we felt that UltraTech was the best.

Why do you think that you are legally right to be doing this?

Sameer Kaji: At this stage, I don’t want to go back to history which was before June 2017. There is a long list of situations which we as a company felt could have been done and which was not done but that’s a standard discussion that every bank and promoter has. Coming specifically to particular instance, we feel that the IBC does provide participation of the corporate debtor representatives. That’s one.

Second, since there was no haircut, we envisaged as per the various stakeholders are concerned, we felt that by participating in these meetings, we can add value by maximising the ultimate bid value. Third, why were we then sent out the agenda of A, B, C, D, E where one of the items on the agenda was discussion on the resolution bids or finalisation of bids. If this was the case, that very well could have been a closed-door meeting where the suspended director should not have been invited or there should have been a note within that invitation that for item four you will not be participating in that part of the meeting, which they have never done and they have never given that in writing.

Do you see the directors having the right to demand any information or having the right to determine the right value for maximisation for Binani Cement when there is an RP and Committee of Creditors in place to do that decision making?

Rajat Sethi: I think the IBC itself has set out a process and it has decided that the resolution professional is going to discharge this function under the supervision of the Committee of Creditors and no process is ever going to be infallible. There may be some mistakes in the process. We are early days yet into the IBC. I think it has to look at it in totality – whether in substance they ran due process, whether they assured equal opportunity to all bidders. In terms of participation of corporate debtors, it is entirely up to the discretion of the RP and the Committee of Creditors, as to what they feel is an appropriate role for participation of the corporate debtor.

You are saying, legally speaking, if the corporate debtor was invited to meetings to contribute to some parts of the conversation but not being given information with regard to the bidders, you’re saying that would be fine.

Rajat Sethi: I think, in terms of how the process is run, whether they were informed in advance that that they will be not participating in particular items or an agenda, perhaps it could be handled better. The way he articulated that the argument did not seem to me a flaw.

It does look like because of the side deal that you have with UltraTech, it seems that the resolution process will come to halt in court. In all this time the value of the asset will diminish. So what are you trying to achieve?

Sameer Kaji: We are trying to achieve equity value for all stakeholders which we are certain of in this instance.

But this asset is no longer in your hands. It has moved to RP and Committee of Creditors.

Sameer Kaji: But what about the other shareholders? What you are talking about is that there are assets which are no longer in our control. But there are 40,000 other shareholders.

It doesn’t matter. Their rights are also in suspension.

Sameer Kaji: Lenders are not concerned whether A, B, C is a resolution applicant who ultimately runs the company. Lenders’ main objective is that they get paid what they feel is their legitimate dues.

They made the decision in picking Dalmia Bharat.

Sameer Kaji: In July, when the reference got accepted at NCLT, the CoC members or the lenders said that A or $100 is our legitimate due. I am sure that they have done it with due thought, understanding and without making any errors. In January 2018, that same figure became $100+. There has to be a logical reason why after four to five months of the process being run, you decide to revise your bid. At that stage, we or the corporate debtor wanted to understand the logic of why $100 became $100+.

Is this valuation or outstanding point of view?

Sameer Kaji: All this leads to final bid value, whether it is Dalmia or UltraTech or A, B, C bids. They need to understand what their liability is.

You are saying that you dispute the outstanding that the lenders have come upon.

Sameer Kaji: On day one, we never disputed the figure which was agreed upon and circulated. We totaled the number and they don’t get to all those details. Primarily, I am talking of secure creditors. Secure creditors +/-5-7 percent, I rounded off to Rs 3,800 crore.

Now, you are saying that they are claiming a higher outstanding.

Sameer Kaji: That amount in January went to Y which may be close to Rs 4,200-4,300 for various reasons. Why would you take five months to revise your liability figure when you had all the time – April, May, June, July. Then why did you revise the figure in December-January?

Why are you trying to take a decision on behalf of the lender?

Sameer Kaji: Our NCLT application also talks about it.

But you have not won that application on that case in court.

Sameer Kaji: No. That is yet pending. We are awaiting a decision of the court. They have asked the RP to explain and that process is also pending.

Have you left any flexibility in your understanding with UltraTech at this point in the side deal that if the lenders ask for more, then UltraTech will up the bid amounts?

Sameer Kaji: In our calculation, if we were to take a very fair of numbers being put down under various heads, you have secure creditors, statutory dues, employee dues, operational creditors, these are our major heads. We are 100 percent certain that we can cover all these amounts without any difficulty. Then the institutions or the numbers should prove that now the number is Rs 8,000 crore but we don’t think it is Rs 8,000 crore.

But that is now what the company is asking for and the company is in control of lenders by  court mandate.

Sameer Kaji: But Rs 8,000 crore is not a number I have heard. My point is that even if I take Rs 4,200 crore and add the Rs 400 crore that the lenders have said, and after that the other numbers remains the same like statutory dues, operational creditors. There was a corporate guarantee by Exim Bank which was evoked. If I add all these numbers...

What about the IDBI outstanding?

Sameer Kaji: IDBI is a different problem of Rs 1,560 crore. IDBI had given loan to an independent corporate entity which is meeting all the financial obligations as on date. This is promoter entity. That’s an entity based in Belgium.

What is Binani Cement’s role in this?

Sameer Kaji: Binani Cement’s only participation and responsibility is that they have given a corporate guarantee to IDBI. My view, as an individual is, whoever the resolution applicant is buying a going concern. In going concern, everything comes with it.

So, the guarantee issued by BCL will flow on to new owners. So, where is the question of IDBI being paid Rs 1,560 crore, if they wanted to, like Exim Bank, they should have invoked the guarantee before the NCLT process. Today, if you say that I should have done this six months back, we are not adding that. Even if you are adding it, I yet feel there is scope to meet it. The scope to take your argument further if I were to add Rs
1,560 crore, we may go close to the Rs 7,400 mark. We are not near the 8,000 mark. If I were to add all the numbers, which some of them are in public domain and some are not. We are yet awaiting this morning, information for the RP, for us to opine. I can’t opine today. If we were to add all the items in the puzzle you will yet not go to Rs
8,000 crore.

Suppose you have to go to Rs 8,000 crore, will UltraTech cough up Rs 8,000 crore? Is that worked into your deal or you have no deal there?

Sameer Kaji: We have a deal and there is margin for error. It doesn’t go to Rs 8,000 crore. If I were to add Binani Cement‘s liabilities, it can’t go up to Rs 8,000 crore.

You didn’t consider Dalmia Bharat for your side deal?

Sameer Kaji: Before the ordinance not allowing promoters to participate, which came in October, there were discussions with Punit, the promoter of Dalmia Bharat which didn’t fructify in a conclusion or something which we take it to a logical conclusion.

So the only reason you’ve picked UltraTech is that you believe they are willing to pay more? Because that is the enhanced bid they tried to register with the COC.

Sameer Kaji: Why did the discussion or the partnership evolved? Why we took it to different level was, if one were to track last 15 days, UltraTech was very close to H2 or a second bidder. Nobody knows under what heads are Dalmia or UltraTech or 3rd or 4th bidder, how did they ear-mark cash outlays or what were the contours of the transaction. As per media reports, we were told that there was only a Rs 50-100 crore gap between the H1 and H2. That’s the reason which even UltraTech wanted to understand that why have we being left out. There were certain media reports which said that it was because of certain CCI implications but both of them say that they are clear of CCI.

Legally, the process does not include the promoters in any fashion anymore because it is the court and the creditors who are now in charge of the assets.

Rajat Sethi: That’s how the court has been designed and that’s the law. There may have been flexibility for something like this before the petition was admitted before the NCLT. But the petition is admitted here. Here bids are invited, the highest bid is selected in the wisdom of the Committee of Creditors. That bid has been presented in the NCLT and now this alternative has been presented. Certainly, the way the code has been designed does not support it. I think the moot point here is, ultimately, it is all before the NCLT.

Even when the alternative transaction has been presented, as Mr. Kaji is saying it has all gone to NCLT. So, the NCLT will look at it. May be the process is being tested right now and it will give rise to a precedent which can be used in future. In terms of the immediate impact on this deal, it will slow down the transaction. This looks like it will go all the way to the Supreme Court.

Do you think this is just the part of testing the law or it will have negative consequences? We have 12 large ones and 28 others. If every company starts doing this, what is going to be the outcome of the Insolvency process?

Rajat Sethi: The more complementary view is that it is initial days for the statutes. It is good that it is tested. The legislature has already included a provision which says that promoters are disqualified from bidding. Not only promoters but the persons acting in concert with the promoters. All those concepts are yet to be tested. If it is put through a ringer and courts ultimately conclude that, one way or the other it will be helpful for the process going forward.

If this succeeds then what precedent is set for all other insolvency?

Rajat Sethi: In terms of the guidance that IBC itself has set up that promoters are disqualified and they have gone way far beyond what was required in terms of connected persons, etc. and putting down the test for that. But the way the legislature has put that down, there is no scope for doubt of what the intention is. That the promoters have no role in this process and they are completely out of it. To that extent, the law has little room for ambiguity.

The point that Mr. Kaji is making is in terms of the process, that is the larger point. In terms of promoters seeking to intervene, that is directed by the process itself. It seems to be based on the announcement to the exchange, a statement of intent rather than definitive transaction.

All the shares of the promoter are pledged with the institutions and the same institutions have to release that pledge for the transaction to be effective.

Sameer Kaji: But once they are paid, the shares will be released. I owe you $100, I am ready with $100.

But you had that chance earlier. You don’t have that chance now, according to that law.

Sameer Kaji: The NCLT has the power to take a decision today. The RP has expected and nominated Dalmia as the final resolution applicant. But the decision lies with the NCLT. I feel the NCLT court can look at the larger picture where they can say that we are not only looking at secure creditors but looking at everyone and all the shareholders and this is what we would like to do. There are select lender within our basket who are open to do this.

So you have turned some of the lenders in your favour?

Sameer Kaji: I have not turned. If you look at the media reports, there are lenders who have said that as long as we get our dues, we don’t want to worry as who is the end driver project. Bank is not concern to manage the company because there would be new set of lenders. Part of them might same but this lenders are going to get settled. You may have a Bank of Baroda or Canara Bank or State Bank of India, but they will be under the new promoter. So, they are ready to get the money and walk out. Why would they want to get into this? They don’t want to delay the process. If you will ask the 40,000 shareholders, they will say we are happy.

Rajat Sethi: I believe that, keeping in mind the overall intent of the statute, the NCLT will be curtailed by the parameters of the IBC. In my view they don’t have this kind of flexibility to terminate an insolvency process, and to allow for alternative transaction and accept it. May be it goes before the Supreme Court who says forget about IBC and bid before us and we will accept the highest bid under Section 142, then that could be a subject matter and that could be for an exceptional case. The burden of proof is on them to establish that this is an exceptional.

Sameer Kaji: Again this is an evolving process. In the list of 50 odd active companies, this is the only entity which has any value. All the others are looking at major haircuts. We need to have a separate discussion of how this was not being paid up offline.

Rajat Sethi: Why this happened does not influence where we are currently.

Sameer Kaji: Prior to the NCLT reference in June 2017, the promoter had confirmed to lenders or group of lenders that he is open to handover majority to strategic investors and not to the bank who are under SDR. That option had already being given. There were people who wanted to consider a takeover at that stage.

The promoters have now no power to re-acquire the asset even if they have money which is current law and that you are testing it is very interesting and prompters giving it without a fight is also very interesting.

Sameer Kaji: Banks are in charge but why don’t they want to maximize value on all shareholders?

Maybe they believe that the Dalmia Bharat bid is better.

Sameer Kaji: So, why can’t share that information with everyone. Even that information is not coming.

Rajat Sethi: In terms of due process, it is early cases and it will get tested and the principals will get developed.