One of the first players to successfully acquire a stressed asset under the country’s historic bankruptcy law, Tata SteelNSE -2.48 %‘s CFO Koushik Chatterjee said that due diligence before taking over remains a key challenge under the Insolvency and Bankruptcy Code (IBC).
“Due diligence is a challenge. The issue is that in an IBC asset you would not get everything — not all the information, not all the access, as the resolution professional is himself struggling in managing the business and is not an industry person in many cases,” Chatterjee said speaking at an event organised by the Confederation of Indian Industries (CII).
Chatterjee said that due diligence , a process during which a prospective acquirer takes stock of the asset by looking at company data, walking around sites , doing third party diligence, is one of the most critical areas of any merger and acquisition (M&A) activity but is often considered customary and left to advisors to carry out.
“There has to be about 45% of senior leadership engagement in the process,” he said.
“Another challenge is that these are stressed assets so they will not be compliant in many aspects like paying taxes etc. If, in those circumstances, a whitewash is not available then it would make the investor fairly uncertain about how to deal with it.”
Tata Steel was one of the first players to acquire an asset out of the 12 assets notified by the Reserve Bank of India needing immediate resolution under the IBC. The company had paid Rs 35,200 crore for a 5 million steel plant that would bolster its presence on the eastern coast of India where it has plants in Odisha and Jharkhand.
In recent times, resolution of a clutch of assets under the IBC has been derailed after the successful bidder has alleged “discrepancies in information shared” at the time of due diligence and what exists on ground. Amtek Auto with its subsidiaries like Metalyst Forgings and Castex Technologies has been one of them where Liberty House refused to pay for the asset citing such discrepancies. The companies appellate tribunal had ordered its liquidation last month but Supreme Court on Tuesday has quashed the ruling and asked for a fresh resolution process to begin. It has given the resolution professional 21 days to invite fresh bids for the asset that owes more than Rs 12,000 crore to the Indian banking system.