Business

Instead Of Lenders, The Insolvency Process Is Aiding The Bidders

NEWS WORLD INDIA | 0
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| May 31 , 2018 , 16:06 IST

The delay in the insolvency resolution process of debt-ridden companies is now giving birth to several questions and financial confusion. While resolution plans submitted by a couple of bidders have been approved by the National Company Law Tribunal after being reviewed by the committee of creditors, so far none of the accounts has been resolved because of delay due to many reasons. This has led to a loss to the lenders and gain for bidders.

Tata Steel, in its bid for Bhushan Steel, offered an upfront payment of Rs 35,200 crore to lenders, along with 12.27% equity. Tata Steel’s resolution plan also proposed a payment of Rs 1,200 crores to certain operational creditors.

Likewise, Vedanta has submitted its plan for Electrosteel wherein its wholly owned subsidiary would acquire Electrosteel’s shares for Rs. 1,805 crore and provide additional funds of Rs. 3,515 crore by way of debt.

The bids have been approved based on the assessment of the financial condition of the company being liquidated at a certain date.

Many of the companies are performing well and generating cash significant cash from operations. There is an accrual of cash in these companies in the time period of delay that does not reflect in approved bids. This cash that should have ideally gone to the lenders would accrue to the bidder.

A close look at the last available result (3rd Quarter) of Electrosteel and Bhushan Steel clarifies this further. The Q4 results for these companies were not available at the time of publication of this article.

Q3 FY 18

Electrosteel

Bhushan

Total Income

857.09 crores

4412.75 crores

EBITDA

68.83 crores

610.27 crores

Cash flow from Operations + Other Income
(these companies are not paying interest to banks,
hence Finance cost is accruing as cash)

77.54 crores

439.78 crores

It can be seen that there is a significant accrual of cash in a single quarter. Industry experts suggest that Bhushan Steel, for example, would have accrued positive cash flow of more than Rs 1000 crores during this period.

Also Read: Insolvency And Bankruptcy Code Proceedings: Is The Loss To Banks Much Higher Than Projected?

Typically, the valuation of any company is broken in two parts viz. the Enterprise Value and Net Current Assets. Enterprise Value is generally the business value and a static thing which doesn’t vary on daily basis. Net Current Assets vary for a company on daily basis and is typically valued at the time of consummation of the transaction. Accrued cash forms part of net current assets. However, as per the industry experts, even though this two-part valuation is a standard practice, this has not been followed under Insolvency Process. The huge amount of accrued cash flow is going to the new acquirer for free at a cost to banks.

What is further surprising is that all the banks and even RBI are silent about this additional loss to the banks.