Tata Steel has reportedly prevailed in the bidding for Bhushan Steel that was being resolved under the Insolvency and Bankruptcy Code, acquiring a 73% stake. It will help revive the bankrupt steel company, aid consolidation, result in recovery for lenders and lower the taxpayer spend to clean up the banking mess. Lenders to Bhushan Steel, led by State Bank of India, will receive Rs 35,200 crore to settle their dues of over Rs 56,000 crore. This works out to a 37% haircut for the financial creditors. This is not perfect, but the best possible outcome given the level of competition for the asset.
However, Tata Steel faces legal challenges from rival bidders. The National Company Law Appellate Tribunal (NCLAT) is scheduled to hear a petition filed by Neeraj Singhal, promoter for Bhushan Steel, objecting to Tata Steel’s takeover. But it refused a stay on the proceedings. That is right: Bhushan Steel should not be able to block the resolution on procedural grounds.
Renaissance Steel, too, is reported to have moved the NCLAT to declare Tata Steel’s bid as ineligible. The only valid objection to Tata Steel’s acquisition would be that someone is willing to pay a higher price for the asset but has not been allowed to place that bid. If that is the case, the rules should be amended to allow such bidding. The public policy goal in resolving bankrupt assets is to maximise the value of the asset being resolved, minimise the haircut banks have to take and, thereby, reduce the burden on the taxpayer to recapitalise public sector banks.
Legal battles are not unexpected. Tribunals must give their rulings swiftly. The law is being tested and the rules will have to evolve, to subserve the public policy goal. Removing entry barriers, and creating new bidders will make the bankruptcy resolution process successful.