Rashesh Shah, chairman and CEO of Edelweiss Group, a Mumbai-based diversified financial services firm, believes that one should not worry too much about the implementation issues and court cases concerning the Insolvency and Bankruptcy Code (IBC), because they are testing the limits of the law and shaping it for the future. In an interview with Fortune India, Shah discusses the pros and cons of the code and how challenges facing the code can be overcome. Excerpts from the interview:

Are you surprised at the Supreme Court decision to send the Binani Cement issue back to the National Company Law Tribunal (NCLT)?

I’m not surprised. I believe that any law is made in Parliament but tested in the courts. Right now the entire IBC is going through the whole testing process. In a way, I think it is a good thing. There are arguments on both sides and the Supreme Court has told the litigants to go back and argue the case in the NCLT. So in a way the courts are also trying to assess how to interpret the law. I am actually happy that cases like these are being heard very quickly. I don’t think there is a fundamental flaw in the actual law. The testing process takes its time. So we have to give it time.

Out of the initial 12 companies sent to the NCLT, there were companies which needed resolution for the last three or four years. Now the resolution professionals are asking for a few more weeks. But if these extensions ensure that the lenders get Rs 1,000 crore or Rs 2,000 crore more, then what is the harm in it? For example in the Essar Steel case, there was rebidding and a new bidder Vedanta came in and if that sees a 10% increase in prices, I think that is a good thing. I think there are three or four things that is happening. One is that the media is giving a ball-by-ball commentary on the NCLT/IBC process. That is making things look more exciting than it actually is. But if you take a longer perspective, I feel the 270-day period will be observed and creditors/lenders will make good use of the entire 270-day period. There is no need for us to decide in 150 days. Here you are dealing with companies worth thousands of crores, and not just buying a bar of soap at a supermarket. This is a process which I think requires some patience and perspective. I think cases like Binani are very good cases because they will test the limits of the law and shape it for the future.

Why was Numetal allowed to bid along with JSW Steel despite Section 29A of the IBC?

Ultimately, there is subjectivity in all this. Earlier, Rewant Ruia of Numetal had 25% stake in the company and so he was deemed to be ineligible. Now they have removed him and so have become eligible for bidding. Same thing applies to ArcelorMittal. They were promoters of Uttam Galva. Now they are no longer promoters of Uttam Galva. Uttam Galva has done a one-time settlement, so ArcelorMittal has become eligible. So these are all interpretations but people have to interpret it in a logical way. These interpretations will be challenged in courts and courts will decide whether the interpretation is valid or not. So whether the brother-in-law of Sajjan Jindal falls under Section 29A, is a subjective interpretational issue. I think that three to four weeks is not a big price to pay for both short-term and long-term resolution of distressed assets.

As a creditor what is your opinion of Section 29A? Should it have been introduced?

There is both good and bad that have come out. I hope in the long run we remove Section 29A, because the more bidders a distressed asset has, the better will be the price discovery. But there is a good part of Section 29A, which we have realised now but did not see it coming. Earlier, a lot of promoters thought if a company goes into NCLT, then it can offer the banks a haircut and pick up the same asset for cheap. Secondly, if the promoters are also bidders in the NCLT process, then other bidders are reluctant to come. They feel that the promoters have an inside information and will pay the best price for the asset. Promoters will have the best informational advantage of what the price should be. Therefore, a lot of people didn’t want to make the effort once they realised that the promoter too was in the fray. ArcelorMittal may not have come ahead and bid for Essar Steel if they knew that the Ruias were in the race. So people have been bold enough once the promoter has been kept out of the bidding. There was a feeling that that the new bidders were taking the company away from the promoter, which is not a correct thing to do and may not be viewed in the right way. So by keeping promoters out you have emboldened the other bidders.

That is an unintended outcome of Section 29A. So now you are getting other bidders also and coming in with good prices. By not allowing Bhushan Steel, Tatas came in for the bidding. In a few cases, keeping the promoters out was not such a bad thing, because even otherwise many of the promoters would not have the wherewithal to put together a competitive bid. Essar didn’t have the money, it was VTB Bank of Russia that was bringing in the money. In the case of Bhushan, even if Neeraj Singhal was eligible, he wouldn’t have been able to arrange the money. So in any case, promoters bid would have been for restructuring, while the new acquirers would be putting up a large amount upfront. If they had that money, then the company wouldn’t have gone into NCLT. But in some of the smaller companies, you might want the promoter to be there since liquidation may be the only option since there may not be any bidders. The idea is to ensure that the restructuring is done pre-NCLT. In case of companies below Rs 1,000 crore, Section 29A should be relaxed. That is what we are arguing for.

Are there enough safeguards for the resolution professional in the law?

I assume there are safeguards for the resolution professionals in their normal discharge of duty. But there may not be if there are charges of malfeasance against the resolution professional. The new buyer is also not an inexperienced player. In a way the resolution professional is like an auditor. If there is malfeasance you can build a case against him, but not in the normal discharge of duty.

In a resolution plan what do you rate the highest?

Ability to put cash on the table is an important factor when we evaluate the new bids. Otherwise, lots of people will come for restructuring the company. Ability to turn around the company and scale up is also an important parameter because at the heart of the IBC is revival, not liquidation. That is why there are scoring points and is such a complex process. You are selling a company worth thousands of crores with several stakeholders and thousands of employees, etc.

Are the minority shareholders being taken care of?

In most of these companies, there is no equity value left because of the high debts. If your enterprise value is Rs 1,000 crore and debt itself is Rs 1,500 crore then where is the equity value? Enterprise value is equal to debt plus equity value. If the debt is higher than enterprise value then there is no equity value. In a lot of NCLT cases, there is still equity trading going on in the market and there is hope that once the restructuring is done, the equity value will come back. Usually, the equity value swings very sharply when you go from a bankrupt company to a growing concern.

What are the other challenges that you see?

If there are too many banks, then forming a consensus within the NCLT is difficult. The dissenting creditor will get paid the liquidation value so they actually have an incentive to dissent and get the money. A lot of small creditors and banks also get a hold-out premium. They can then blackmail the creditors by saying that I am dissenting and thereby taking the cash away. This is a problem even in the pre-NCLT phase. When companies have to negotiate with the banks individually, the ones that hold out can bargain for a better deal at the end. I think price discovery is also a bit of a problem if there are not enough bidders.

The other problem is that once the company goes into NCLT, the working capital needs to go up since suppliers don’t give you any more credit, because they fear that if the company goes into liquidation the suppliers won’t get paid. So there are all these issues. Putting unsecured creditors on the creditors committee is not fair. If you are not putting trade creditors on the committee, why are you putting unsecured creditors? And that too with equal voting rights? For example in the case of Synergy, the promoters made sure that their own group companies were unsecured creditors and managed to get a large chunk of the voting rights, almost 80% of the rights. They then accepted a proposal which was inferior but the promoter was able to get away with it. That is why we are in the courts about this matter.

When do you think this law will settle down?

There is an interpretational volatility but that is coming down. Some amendments to the IBC have been proposed. In the US, there were more than 100 amendments to its bankruptcy code in the first three years. It is not that the Indian IBC will become black and white in the next three years but the precedents will get established over the next year or two.

Are global investors happy that there is a law or are they concerned that there are so many amendments to the law?

Everyone is happy that there is a law finally. We were much worse without a law. I think it is a good law and it is coming along very well. It has only been a year of this. It will take some time. I am sure that before June, all the 12 cases will be done.

Should defaulters be treated differently on a case-to-case basis?

Wilful defaulters or fraudulent promoters, we believe, should not be allowed to bid under Section 29A. But a normal NPA promoter, not being allowed to bid, is very harsh. But even the definition of a wilful defaulter is not clear. Each bank can decide on a wilful defaulter and are using that as a threat. But these issues too will settle down. These are all normal market activities. There will be some push and pull in the initial months but all of this will settle down.

(For a detailed look at the issues with the Insolvency and Bankruptcy Code, read the May 2018 issue of Fortune India, now on stands.)

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