That one of the bidders for an asset being sold in the resolution process under the Insolvency and Bankruptcy Code (IBC) is offering, outside the IBC framework, a price higher than what the IBC process has determined to be the highest bid shows up a shortcoming in the current IBC process.
The process must change, to allow continuous competitive bidding by interested parties till only the highest bidder remains in the fray.
Ironically, the government uses precisely such a competitive bidding process in the case of radio spectrum, where jacking up the cost of spectrum is not in the public interest.
UltraTech lost the bid for Binani Cement to Dalmia Bharat by some .`200 crore in the IBC process. Since the process does not allow successive rounds of bidding, the creditors favoured the Dalmia bid, as offering them the highest bid and more than their secured outstanding loans. Thereafter, UltraTech has offered Binani promoters the money needed to pay off the loans on which Binani had defaulted, and a little more, to buy out the promoters’ stake.
Now Binani wants to take the company out of the insolvency process, paying off the loan and selling the company to UltraTech.
This shows up yet another shortcoming in the IBC process. Once a company becomes bankrupt and is referred for resolution, it should cease to have any equity other than what the creditors acquire by converting their unpaid debt into 100% of the company’s equity.
Instead, right now, the shares of bankrupt companies continue to trade on the stock market. This, too, must change. Once a company has been declared bankrupt, its resolution must take place through the IBC procedure. The procedure should amend its bidding process, to achieve the public policy goal of maximising the value realised for resolution of assets. From the proceeds of the auction, what remains after paying off secured creditors, employee and statutory dues and unsecured creditors, should be paid to erstwhile shareholders pro-rata.
Making these two changes to the IBC process is the right thing to do, not deal-making outside the IBC process.
via UltraTech shows up two flaws in IBC: Mend, to maximise value of distressed asset