In an earlier blog post, I had compared Ultratech Cement’s tenacious pursuit of Binani Cement to a street-smart Bollywood cad outwitting the girl’s forbidding parents to win her love. If recent events are anything to go by, the cad seems to be succeeding.
Prior to bids (or resolution plans, as the IBC terms them) being received for Binani Cement, it was made clear to all prospective suitors that their offers would be judged as per an “evaluation matrix”, which assigned points for various aspects, such as how much a bidder was willing to pay upfront.
The bidder that garnered the most points (called the “H1 bidder” in IBC jargon) would have the privilege of being called for negotiations with the Committee of Creditors. If found fit in all respects after negotiations, the bid of this bidder (and no other bidder) would be voted on. If approved, it would be sent to the National Company Law Tribunal. Once the NCLT grants its approval to a resolution plan, it is considered final, and the insolvency process is deemed to be over.
Ultratech was not the H1 bidder, losing to a higher bid by Rajputana Properties, a subsidiary of Dalmia Bharat. It was therefore Rajputana that was invited for negotiations. Rajputana submitted a revised bid after negotiations with the CoC. This was on 7 March 2018. The next day, Ultratech emailed a substantially larger bid than Rajputana to the resolution professional handling the insolvency process. The difference is said to be over Rs. 1,000 crores.
Neither the resolution professional nor the CoC agreed to consider this bid. The CoC, comprised of banks, felt bound to follow a circular of the Indian Banks Association (which was based on Central Vigilance Commission guidelines) that mandated that as members of the CoC, they would only negotiate with the H1 bidder.
Ultratech moved the NCLT at Kolkata. The NCLT decided that the CoC was bound to consider Ultratech’s revised offer, and its failure to do so was not legally sustainable. It could not cite any law to show why this was so, since there is none, and seemed to focus more on the fact that the CoC could have considered the revised bid if it had wanted to. But it didn’t want to!
The outcome will be decided eventually, but law aside, surely Ultratech has a point? If the IBC is going to result in stakeholders having to walk away from over a 1,000 crores, as in this case, its rules need tweaking.
This is what I think:
Rather than the present process of calling for bids and then negotiating with the H1 bidder at the end of the first (and only) round, to the exclusion of all others, there should be a two-step process, so that stakeholders of the insolvent company can benefit from a little competition among bidders. At the end of round 1, everyone should know what everyone else has bid, and get the chance to bid again. After the second bid, it should be curtains for all but the winner.
To discourage lowball bids during the first round, the winner can be given two benefits: 1) bonus points that can be carried over into the second round; and 2) a ‘right to match’, entitling the winner of round 1 to match the bid of the winner of round 2. This should encourage value maximisation and prevent frequent knocks on the NCLT’s doors.
The system that I propose wouldn’t need any amendments to the IBC or any fresh regulations, and can be incorporated into the evaluation matrix and process documents handed out at the start of the bidding process.
The one thing that the Binani Cements saga has taught us is that the IBC regime needs urgent fixing. Currently, it yields unthinkable twists (much like a Bollywood movie) and unpredictable endings (most unlike a Bollywood movie).
