This article is written by Kaushal Mathpal, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from lawsikho.com.

Introduction

The Insolvency and Bankruptcy Code(IBC) was enacted in 2016 with an aim to consolidate then current bankruptcy law into a single law. Prior to the IBC, winding up route was followed under the Companies Act, wherein there was no effort to revive the company. The previous bankruptcy law aimed at liquidation of the company by selling its assets and paying the creditors. Further, such matters moved at a snail’s pace due to extensive involvement of courts at each stage.

Contrary to the previous bankruptcy law, the IBC followed a different approach right since its inception and further evolved in the last 4-5 years. Various amendments were introduced keeping in mind various judicial pronouncements and new developments. The main attributes of the IBC are:

• Time bound resolution– The IBC provides strict timelines for completion of various stages of process. The maximum time period for resolution is 9 months (including the grace period of 90 days). Although, the process sometimes exceeds the above timelines but it’s still more effective than the court driven process.
• COC driven process: Under the IBC, a committee of creditors are appointed which have wide powers to approve resolutions and the proceedings are run/managed by the Resolution Professionals. The role of the adjudicating authority is only limited to monitoring the process with the assistance of RP as and when required. 
• Efforts for resolution: In the earlier bankruptcy process, it was not focused on saving the company from going down the path of winding up. As a consequence of the same, the creditor had to take larger hits on their and unsecured creditors were at greater loss. However, in IBC, there is an attempt to revive the company by inviting resolution proposals from industry. These resolution proposals offer a better recovery package to creditors and also save the entity from going into the liquidation process.

Impact on mergers and acquisition 

As pointed out above, IBC proceedings are aimed at providing a resolution for corporate debtors as against the liquidation. Due to these reasons, it has opened new doors in M&A and M&A of distressed assets have evolved as an entire new practice for law firms.

As per the reports, till 2018, the M&A deals in distressed assets worth USD 14.3 billion were done in just 2 years of operations of the code. Further, the numbers have only surged since then as the banks are unwilling and trying to prevent their losses are moving toward IBC for reliefs. These put decent assets at below market valuation open for acquisitions. As per the data published by IBC in 2018, there were around USD 24 billion distressed assets to be moved under IBC. These included big names such as Bhushan Steel, Reliance Communications, Jet Airways etc. The companies in steel, power, real estate, aviation are in forefront of the companies which came up for resolution under IBC. In 2018, distress M&As accounted for 12% of the total M&A value led by deals involving Bhushan Steel.  In terms of actual deals, distressed M&As has accounted for about 3% of the total M&A volume in the Indian market and 21 out of a total 623 deals completed since 2017. 

Most of the deals under IBC deals were being undertaken by domestic investors only such as acquisition of Bhushan steels by Tata Steels, Binani Cement by Ultra tech cements etc and most of these deals were driven through strategic motives. However, in the present times, more and more foreign PE /Investors have shown their interest in M & A of the distressed asset. The recent bids by Hindujas, Lufthansa, Synergy Group etc. into grounded Jet Airways are clearly evident of the same and are going to increase in the coming times. 

With banks pushing for change in management of loan defaulting companies, corporate assets are available for acquisition at a throw-away price. Swift, time-bound resolution or liquidation of stressed assets will be critical for de-clogging bank balance sheets and for efficient reallocation of capital. Stressed assets are in multiple sectors, so M&A are expected to happen in multiple sectors. Further, due to the time bound feature of the IBC, the code not only augmented the M&A activity in the distressed asset but also contributed towards catapulting India’s position to 77th rank (23 ranks up) in World East of Doing Business 2019. The IBC is solving problems at two ends – 1. Removing the stressed assets from the market and again making them productive and contributing to the economy under the leadership of new management/promoters 2. Clearing up the bank’s NPA problem allows them to improve their credit positions at lower haircuts than the normal liquidation process.

The IBC is acting as a filtering agent for the economy by cleaning up the distressed assets and making them productive (as already stated above). In addition to the above, it is also disciplining the companies/promoters to make calculated moves with respect to their borrowing and incurring liabilities. Also the banks/financial institutions are also more vigilant considering their past history and rising NPA which has also led to complete overhaul in the banking system such as merger of PSU banks. The IBC success can also be attributed to the proactive role the government has played in implementing the same and simultaneous support from the judiciary. Further, with some big resolution successfully undertaken via IBC route and quick amendment to pluck the loopholes has also put faith on its effectiveness.   

Major amendments affecting M&A under IBC

As already stated, the government has been swift in removing the roadblocks from the successful implementation of IBC. The IBC has already been amended thrice since 2016 incorporating major changes such as inclusion home buyers in financial creditors, prohibiting promoters of defaulting companies from bidding for distressed assets, clarification on approaching the Competition Commission of India for approval etc. Apart from IBC, several other laws were amended to bring it in line with the IBC. Some of the major amendments are:

• Takeover Code

In listed companies, the threshold limit of 75% is maintained for private parties in order to meet minimum public shareholding of 25%. However, since in distressed states, infusion of capital or conversion of equity is of paramount importance. Therefore, the above restrictions were removed for companies under IBC.

• Exemptions from Delisting

The delisting procedure under the SEBI (Delisting of Equity Shares) Regulations 2009 (Delisting RegzaSWQ regulations) will no longer applies to any delisting of equity shares pursuant to a resolution plan under the Code, if the following conditions are satisfied: 

• • • the plan sets out a specific delisting procedure; or
    • the plan provides an exit option to existing public shareholders at a price not less than the liquidation value, and; 
    • Further, if the promoters are exiting at a higher price, the exit price for public shareholders should not be less than the price obtained by the promoters. 
• Competition Commission of India

The Competition Act, 2002 acts come into play when the turnover of the assets of investor and corporate debtor require mandatory approval of CCI. The CCI has been notified in 13 large transactions and CCI has granted approval to all of them and that too in a time bound manner. 

As per the Act, the obligation resides on the acquirer to notify CCI if the trigger is met and upon execution of the binding document. However, earlier it was not clear whether what would constitute an executed document in the case of a proposal made to IBC. Whether submissions of resolution plan or approvals of such resolution plan by COC?

The question further gets complex when multiple investors are targeting the same corporate debtor. The question which arose was whether notifying the CCI, prior to the approval of a resolution plan by the COC would constitute a ‘premature’ filing since, ultimately only one resolution plan would succeed?  On the other CCI in certain cases had approved resolution plans as binding documents for the purpose of filing notice. However, there was no clarity on the issue which resulted in unnecessary delays in the process. Further, if the resolution plan was approved by COC and if then notified to CCI which would have taken a negative view on such resolution, such instances would have been more detrimental to the resolution process under IBC.

In order to clarify the same, an amendment was carried out in IBC in 2018 which introduced new sub section 4 in Section 31 with proviso. By way of this proviso to the new sub section (4) of Section 31, it has been provided that where a resolution plan or any part thereof constitutes a ‘combination” under section 5 of the Competition Act, 2002 (the Act), that is, in the case where the combined values of the assets or turnovers of the resolution applicant and the corporate debtor proposed to be acquired cross the thresholds prescribed under section 5 of the Act, it will be mandatory for the resolution applicant to obtain prior approval of the proposed acquisition from the  Competition Commission of India (‘CCI’) and in such cases, the CoC shall have to wait for the CCI approval before approving the resolution plan.   

The said proviso to sub section (4) of Section 31 of the Amendment Act reads as follows: 

“Provided that where the resolution plan contains a provision for combination as referred to in section 5 of the Competition Act, 2002, the resolution applicant shall obtain the approval of the Competition Commission of India under that Act prior to the approval of such resolution plan by the committee of creditors”.  

Conclusion

The prospect looks good for the IBC in India and will continue to drive the mergers and acquisition in distressed assets. It is expected that in the coming years, it will majorly contribute to the overall M&A deals in India for several factors such as 1. Banks attempt to recover their losses/NPA and clean its books. Still, Indian financial institutions have such large borrowers which have clogged the banking system 2. An opportunity for investors to acquire companies at comparatively cheaper valuations.

Further, the government has also been closely watching this space. The current pandemic situation will also put various entities under stress and some of them may not be able to recover from losses piled up due to pandemic. In such cases also, banks/FI will approach the IBC without waiting much and which in turn will present opportunity for the acquisition & mergers.

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