A couple of weeks back, Tata Steel Ltd announced that it had signed definitive agreements to acquire aa 73 per cent equity stake in Bhushan Steel Ltd (BSL) for around ₹36,000 crore. Tata Steel expects that the acquisition under the corporate insolvency resolution process will generate significant synergies and is a win-win proposition for all stakeholders.
But this transaction is more than a mere acquisition of one company by another; the Bhushan Steel case is a major breakthrough in terms of reforms (for the current BJP government) in strengthening the Indian banking industry.
Stressed assets problem
Stressed assets are a major challenge in the Indian banking industry, and figure as an important point in the current government’s reform agenda. These assets are an aggregation of non-performing assets (NPAs) and restructured loans. NPAs are loans that are overdue (principal, interest or both) for more than 90 days.
As of today, stressed assets are valued at around ₹10,00,000 crore — roughly 70 per cent of these are NPAs and the rest are restructured loans.
Overall, stressed assets in the economy make up more than 15 per cent of the total loans and advances made by banks. A bulk of these stem from public sector banks, which have 14 per cent NPAs, while the private sector’s NPAs stand at less than 5 per cent.
The regulations
Last year, an amendment to the Banking Regulations Act 1949 gave rise to the new Banking Regulations (Amendment) Bill 2017.
This enactment gives the Centre, the RBI and the banks more power to hasten the process of debt collection. Defaulters and companies classified under the stressed assets programme can be dealt with more stringently, and within shorter time-frames. This can lead to a reduction of NPA levels in the economy.
The enactment empowers the central government to direct the RBI through the banks to act against loan defaulters, and refer them to the National Company Law Tribunal (NCLT), which will then initiate proceedings under the Insolvency and Bankruptcy Code, 2016.
Few players responsible
A panel within the RBI was constituted to list defaulting companies, against whom banks would initiate insolvency proceedings. Twelve large defaulters (companies) that jointly account for around 25 per cent of the total NPAs, were identified.
Of these, three companies — Bhushan Steel, Essar Steel and Electrosteel — had been referredby the lender, State Bank of India (SBI), to the NCLT during 2017 to initiate insolvency proceedings. The three companies alone account for around 10 per cent of overall stressed assets.
The panel also identified 500 other companies that had large NPA exposures.
As a first step, the NCLT initiated insolvency proceedings against Bhushan Steel, which had stressed assets to the tune of ₹30,000 crore.
The resolution
In such cases, there is enormous resistance from the owners, who try to stall the whole process at every stage. In a country where many rich and powerful borrowers think they have no moral obligation to pay back loans in spite of stringent written contracts, insolvency proceedings are very difficult to execute on ground.
The proceedings themselves are quite complex, with shareholders, creditors and employees being involved. In spite of such complications, the first case is set to bear fruit within nine months — no mean achievement.
A win-win situation
In the Bhushan Steel case, the government was in no hurry to sell off the defaulting company on the back of insolvency and bankruptcy proceedingsThe potential buyers of Bhushan Steel were, in fact, carefully short-listed and chosen so that it would be a win-win for all the parties involved. . This means the buyer can unlock value from the stressed asset and secure a return on his investment, and thus be ready to pay a higher price for the asset acquired. This will benefit the government and the lending banks.
In this case, Tata Steel saw a lot of opportunities for synergies with its own operations — BSL’s blast furnace, its rolling mills and other supporting infrastructure are highly underutilised. This gives Tata Steel the opportunity to ramp up its production, which could otherwise have taken years to materialise.
Other synergies
There are a number of other synergies that make it a favourable compromise for all the stakeholders. Staff issues are a case in point. Although BSL was technically bankrupt, its entire employees have been absorbed by Tata Steel; a far-reaching move that will have a positive outcome in a growing democracy like India.
This also shows that employees and unions will not oppose such a distress sale but, contrarily, could support it, given there are no job losses.
Although, it is reported that the break-downvalue of the assets on the balance sheet is close to ₹14,000 crore, selling the company as a going concern has yielded close to ₹36,000 crore — an enormous value addition to the economy. It is reported that the lenders have received almost the entire outstanding amounts, without the banks having to take any hair-cuts. This is truly a milestone in managing stressed assets.
The need to celebrate
This transaction shows that there is a viable mechanism to address the stressed assets issue, and the key stakeholders, including the RBI, lending banks and the NCLT, could become more aggressive in going after the other 11 stressed asset cases. The Finance Minister has indicated that this could easily add to the kitty close to ₹100,000 crore.
While the Banking Regulations (Amendment) Bill 2017 enables swift action and recovery, the legislation does not address the root of NPA problem and how such non-performing assets pile up. Banks and their boards need to take several steps, including non-interference by the government in their functioning and decision-making, especially vis-à-vis credit approvals, to improve governance and lay down processes that will enhance the quality of debt going forward.
After all, prevention is better than cure.