The spirit of the law

Post-auction bids will delay insolvency resolution

The resolution process of Reliance Capital was put on hold this week till the next hearing before the National Company Law Tribunal’s (NCLT’s) Mumbai Bench on January 12. The decision of the Bench will not only have implications for the parties involved in the matter but also for the insolvency resolution process in general. The process has been stayed on the objection of the Torrent group, the highest bidder for Reliance Capital. The Hinduja group made a fresh offer to the lenders after the auction was completed and this is what is being objected to by the Torrent group. The committee of creditors (CoC) did not arrive at any decision this week because of the ongoing litigation and will have to wait for directions from the NCLT.

 
The Hinduja group has now made a bid of Rs 9,000 crore and has offered to pay the entire amount upfront. The Torrent group, on the other hand, had offered Rs 8,640 crore for Reliance Capital with a proposal of deferred payments. The Hinduja group had earlier offered Rs 8,110 crore. Given the competing offers, it would make sense for lenders to accept the Hinduja group’s post-auction offer because it is not only higher than Torrent’s bid but will also provide the full amount upfront, which increases the appeal. Since the NCLT would also want higher recovery for lenders, it might consider allowing the post-auction bid. However, there are two important factors that the adjudicating authority and, to an extent, the CoC will need to consider before proceeding.

 
First, speed is of the essence in the resolution of stressed assets and one of the major objectives in implementing the Insolvency and Bankruptcy Code (IBC) was quick resolution of stressed assets. If the NCLT allows the CoC to consider a post-auction bid, it would delay the process and set a bad precedent. It was reported recently that the government is considering amendments to strengthen the IBC. One of the changes in this context should be to bar bids and plans once the auction process is over. This would also incentivise serious bidders to offer close to what they believe is the fair value. In the Reliance Capital case, the Hinduja group could have proposed a better offer before the auction closed. If all bidders are allowed to change their plan continuously, it could considerably increase the resolution time and may, in fact, end up eroding the value of assets.

 

Second, it is worth noting that even the revised bid is considerably lower than the liquidation value. Reports by two valuers suggested the liquidation value of Reliance Capital at Rs 12,500 crore and Rs 13,200 crore. There is nothing wrong with bidding lower than the liquidation value because bidders may differ from valuers on valuation. But the CoC can decide to go for liquidation if that seems to be a better option. It remains to be seen how the CoC views the matter and what the adjudicating authority decides. However, in principle, the idea should be to close the insolvency process as early as possible. As things stand today, the process has been marred by delays, which seems to be affecting recoveries. The latest available numbers suggest that recovery under the IBC is roughly similar to legacy mechanisms. Strengthening the IBC framework with the right incentives will lead to timely resolutions and help reduce capital erosion.