Tata Steel committing ₹45,400 crore for Bhushan Steel—first of the 12 big defaulters on the RBI’s list to be referred to the National Company Law Tribunal (NCLT) for insolvency under IBC—has meant minimal haircut for lenders. But the deal may leave minority shareholders in the lurch, if the resolution plan under Alchemist Asset Reconstruction Company Limited vs Hotel Gaudavan Pvt. Ltd, the first under IBC in December 2017, is any indication. A steep reduction in capital as part of the resolution plan and fresh infusion of capital by the new investor can hurt minority shareholders—leaving nothing on the table for them.
In the Hotel Gaudavan case, for instance, the NCLT approved the acquisition of the Rajasthan-based hotel by a non-banking finance company—JFC Finance (India)—without any haircuts to creditors. But the approved resolution plan included reduction of the existing capital from ₹100 to ₹1 per share. JFC would pay existing shareholders ₹1 per share or ₹17.38 lakh.
“Hence, in this particular case, the resolution applicant (the new investor) has provided for reduction in the paid-up capital of the company from ₹17.38 crore to ₹17.38 lakh,” explains KS Ravichandran, Managing Partner, KSR & Co, Company Secretaries LLP.
“In IBC cases, dilution happens in two ways. One, the resolution plan itself entails a reduction in capital. In certain cases like Murli Industries, which was bought over by Dalmia Bharat for about ₹400 crore, aside from the large haircut of over 70-odd per cent that the lenders took, there was also a huge write down of equity after conversion of unsustainable debt into equity after which the converted equity was bought at a deep discount,” says Siby Antony, Chairman, Edelweiss ARC.
A further infusion of capital by Dalmia Bharat to hold a chunk of the stake in the company reduced the stake of minority shareholders to minimum.
Edelweiss ARC had acquired 65 per cent of Murli Industries’ debt from eight banks.
Unclear provisions
According to KS Ravichandran, given that the new investor is settling dues to the lenders of the corporate debtor (with minimal haircuts in some cases) and also pumping in fresh money into the company, the steep reduction in existing capital is only expected.
“What is of more concern is the fact that the IBC in its current form, is somewhat unclear on the provisions relating to either the procedure of allotment of shares to the new investor, writedown of the existing capital or even whether the resolution applicant will need existing shareholders approval to become owners in the corporate debtor,” says KS Ravichandran.
After all, it would be absurd if the new investor, after emerging the highest bidder and willing to pay off lenders, and infuse fresh capital into the company, is denied ownership in the company due to lack of shareholders’ approval.
In the case of Bhushan Steel, the equity or networth (as of March 2017) was already negative owing to accumulated losses. According to shareholding pattern as of December 2017, public holding in Bhushan Steel is around 42 per cent, of which 15 per cent or 3.4 crore shares are held by individuals having share capital up to ₹2 lakh.
The fate of these minority shareholders is unclear as of now, as the contours of the resolution are yet to be disclosed.
Among the IBC cases, many of the corporate defaulters are listed companies-- Monnet Ispat & Energy, KS Oils, Ennore Coke, Educomp Solutions, Gujarat NRE Coke, Unity Infraprojects, Clutch Auto to name a few. Most of these stocks have already been beaten down by the market.