NCLT Resolutions: The dim minority view

Minority shareholders of debt-laden companies referred to the National Law Tribunal (NCLT) may not get outsized rewards for sticking with their investments through the tortuous journey at bankruptcy courts. Of course, assets of the insolvent companies are expected to be acquired by interested bidders but this alone may not mean much to minority equity investors. Factors such as business viability of the acquired plants and inventories, debt on the balance sheet of the acquirer, and the long-term synergies from post-merger integration would play a crucial role in determining the long-term benefits. The current rounds of bidding may result in bringing $60 billion (around Rs4.3 trillion) worth of assets back in business. The entire insolvency procedure is designed primarily for creditors and it places dues of financial institutions and workers at the top. Equity shareholders come significantly lower down the pecking order. As of September, 1,198 cases have been registered under the insolvency process. Corporate lenders have taken an average haircut of 45 per cent on admitted claims. The cut was the lowest in the steel sector at around 40 per cent, and at 80 per cent in shipping or petroleum. To be sure, for Binani Cement, UltraTech would pay $180 per tonne (based on the 6 million tonnes of capacity acquired in India), and that would be about a third higher than the current replacement cost for setting up a new cement plant. That also means no haircut for banks that had loaned funds to Binani Cement.

If financial creditors are forced to take such steep cuts in their dues, the chances of minority shareholders to receive a windfall look bleak. More than 56 per cent of all closed cases to date were through liquidation of assets, while only 13 per cent cases were resolved with an average haircut of 45 per cent on admitted claims. Minority shareholders might argue that it makes sense to remain a shareholder of a company where haircuts have been comparatively less sharp and a big name has emerged as the top bidder. For instance, Tata Steel’s bid for Bhushan Steel implies enterprise value (EV) of $1,072 per tonne whereas Tata’s Odisha plant after the phase two expansion would cost $760 per tonne for hot rolling coil. Bhushan Steel has been ascribed a liquation value of Rs14,541 crore on the total debt of Rs56,022 crore. Of this, Bhushan Steel will start servicing Rs35,571 crore of debt as an immediate requirement. In addition, the remaining Rs20,000 crore of debt will be on Bhushan Steel’s balance sheet, which repayment schedule on this loan will be decided Tata Steel over a period of time depending upon financial health. That would mean that a major chunk of the cash flow from Bhushan’s operations in the medium term will be spent on loan servicing and repayment. According to the Companies Act, the minimum share capital for a listed company is Rs5 lakh and this needs to be on a pro-rata basis. Which means a successful bidder may reduce the share capital of the acquired company to the minimum required level of Rs5 lakh, which will also reduce the share capital of minority shareholders. And then the bidder may infuse fresh capital without allotting any stake to the existing shareholders. In addition, the new owner may also decide to delist the company.

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