Banks led by the State Bank of IndiaBSE 0.17 % (SBI) have decided that bidders for stressed assets in ongoing insolvency proceedings will have to disclose their source of funds and furnish a cheque for the bid amount to prove their bonafides and be eligible to participate.
The lenders agreed on a common “bid evaluation matrix” at a high-level meeting last week to evaluate bids for dozens of distressed companies that are on the block, said bankers who attended the meeting.
It gives a 70% weightage to quantitative elements such as cash on the table and 30% to qualitative factors such as the bidder’s track record, including the ability to turn around distressed companies.
“All resolution plans involving cash recovery should be backed by a letter of commitment from a bank or a cheque,” according to the guidelines that have been drawn up. “If upfront cash infusion is by way of equity, the source should be laid out in the plan.” EThas seen a copy of the guidelines.
“This caveat is aimed at avoiding mistakes of the past when promoters did not have skin in the game,” he said.A bank chief who did not want to be named said that the conditions were drawn up on the basis of past experience.
Subjective Qualitative Parameters
“They borrowed money from banks and showed it as equity contribution to avail of term loans from another bank.”
Such practices have led to the bad load burden that banks are seeking to resolve.
The framework gives higher weightage to upfront cash payments as well as the bidder’s ability to infuse fresh equity after the acquisition of a distressed asset.
The quantitative parameters include upfront cash recovery as per the resolution plan, net present value factoring in upfront cash recovery, equity upside and fresh equity infusion for improving operations. Qualitative parameters are subjective and include factors such as reasonableness of financial projection, the bidder’s ability to turn around distressed companies and financial track record.
“A common set of guidelines is framed so bankers can compare proposals and secondly no one can complain they have been treated differently,” said a senior bank official. A common evaluation matrix will also help avoid investigative agencies questioning decisions in the years to come, bankers said.
The bid evaluation matrix is mainly framed for those cases that are referred to bankruptcy court since lenders will have to take a decision on the resolution plan within a given timeframe, failing which the asset could be liquidated.
Eleven out of the 12 large cases that the Reserve Bank of India initially directed banks to refer to the National Company Law Tribunal are on the block. These include Essar Steel, Bhushan SteelBSE 2.00 %, Bhushan Power, Lanco Infratech, Alok IndustriesBSE 4.79 %, ABG ShipyardBSE -3.04 %, Monnet IspatBSE -3.29 %, Jyoti StructuresBSE 3.94 % and Electrosteel Steel.