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Bhushan Steel sale: Can it set a precedent?

  The sale of the beleaguered Bhushan Steel to Tata Steel is a significant transaction. Not only does Tata Steel garner synergies and believes it to be a win-win proposition, the deal itself can be a precedent to the others following, thereby solving a large part of the NPA menace in the Indian banking system.  

Dr Suresh Srinivasan

In the second week of May, Tata Steel announced that it had signed definitive agreements to acquire 73% equity stake in Bhushan Steel Limited (BSL) for around `36,000 crore. Tata Steel expects that its acquisition of BSL under the corporate insolvency resolution process will generate significant synergies. The company is also looking to forward to the possibility that the move will turn out to be a ‘win-win’ proposition for all stakeholders.
More than viewing this transaction as 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 currently ailing Indian banking industry. Let us see how.

The stressed assets problem
Stressed assets are a major challenge to the Indian banking industry. This is one of the major agenda items in the ‘to do’ reforms of the current government. Stressed assets are an aggregation of Non-Performing Assets (NPA) and restructured loans. NPAs are accounts that are overdue, principal and interest, or both, for more than 90 days.
As of today, stressed assets are estimated at around `10 lakh crore; roughly 70% of these are NPAs and the remaining 30% are restructured loans.  Overall, the amount of stressed assets in the economy translates to more than 15% of the total loans and advances made by the banks. A bulk of these relate to the public sector, which have NPAs in the range of around 14%, while for the private sector, it stands at less than 5%.

The regulations
Last year, an amendment to the Banking Regulations Act, 1949 was brought in and the new Banking Regulations (Amend) Bill, 2017 was passed. This enactment puts more power in the hands of the Central government, the Reserve Bank of India and the banks to hasten the process of debt collection from companies that have been classified under the stressed assets program. The idea behind this is to allow defaulters to be dealt with under extremely stringent stipulations and within short time frames, so that the levels of NPAs in the economy can be swiftly reduced.
The new enactment also gives power to 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). The NCLT will then initiate proceedings under the Insolvency and Bankruptcy Code, 2016.

The players responsible
With an aim to resolve the worrying NPA situation, a panel within the Reserve Bank of India was constituted. The panel’s mandate was to recommend the names of defaulting companies, against which the respective banks would initiate insolvency proceedings. Twelve large defaulters (companies) have been identified by the panel, and these defaulters jointly account for around 25% of the total NPA in the economy.
Out of these, three companies Bhushan Steel, Essar Steel and Electrosteel had been referred by the lender to the NCLT in 2017 State Bank of India (SBI), with a request to initiate insolvency proceedings. These three companies alone account for around 10% of the overall stressed assets. The panel also identified 500 other companies that have large NPA exposures.
As the first step, insolvency proceedings were initiated by the NCLT against Bhushan steel Limited, which had stressed assets exposure to banks in the range of `30,000 crore.

The resolution: Bhushan Steel case
At every stage of the insolvency proceedings, there has been enormous resistance from the owners to stall the whole process at every stage. The recent past has thrown up several instances wherein many of the rich and powerful borrowers appeared to hold no moral obligation to pay back the loans, in spite of stringent written contracts being well in place.
In such a scenario, and given the prevailing sentiment, the insolvency proceedings have become very difficult to execute on ground. The insolvency proceedings are quite complex, with shareholders, creditors and employees all being involved. In spite of all these complications, the first case is seems to be almost over, with the promise of bearing fruit within nine months.
In the Bhushan Steel case, the government has not sold the defaulting company to any Tom, Dick or Harry on the back of insolvency and bankruptcy proceedings. Rather, a shortlist was carefully created containing names of potential buyers of Bhushan Steel, and the final buyer was chosen in such a way that there would be synergies for the buyer from such a purchase. This means the buyer will be able to unlock value out of the stressed asset and secure a return on its investment. And at the same time, the buyer will be ready to pay a higher price for the stressed asset acquired, which will benefit the government and the lending banks. This philosophy has worked out very well in Bhushan Steel’s sale to Tata Steel.

Possible synergies
Tata Steel sees a lot of opportunities for synergies with its own operations. BSL’s blast furnace, its rolling mills  and other supporting infrastructure are highly underutilised, and this gives Tata Steel a quick, easy and readily available route to ramp up production. Otherwise, had Tata Steel chosen to take the ‘green field’ expansion mode, wherein they set up the entire unit and operations, it could have been years before Tata Steel realised the sort of production they can expect to immediately.
There are a number of other synergies that create a ‘win-win’ scenario for all the stakeholders. Staff issues is a case in point. Although BSL was technically bankrupt, all of its employees have been absorbed by Tata Steel — a far reaching outcome in a growing democracy like India. This also sets a precedent amidst the obvious positive result that employees and unions will not oppose such distressed sale. In fact, contrary to the norm, the employees and unions may even support the sale, especially if they are given the reassurance that there will be no job losses.

The transaction
Although, it has been reported that the breakdown value of the assets on the balance sheet is close to `14,000 crore, selling the company as an ‘as-going’ concern to buyers who have a synergy in such acquisition has yielded close to `36,000 crore, which is an enormous value addition to the economy. It has been reported that the lenders received almost the entire amounts that were outstanding, without the banks having to take any haircuts; this is truly a milestone in managing stressed assets in the economy.
This transaction sets the precedence that there is definitely a viable mechanism to address the stressed asset issue. Consequently, the key stakeholders in the matter, including the Reserve Bank of India, lending banks and the NCLT could become more aggressive in their efforts to go after the rest of the 11 stressed asset cases , which, the finance minister has indicated could easily bring to the pot close to `1 lakh crore. The stressed asset reform needs to be perfected and celebrated!
However, it must be noted that this legislature does not by any means address the NPA problem and its coming into existence. Banks and the boards of banks need to take several steps, including non-interference by the government in the functioning of the banks, to improve governance, and lay down processes that will enhance the quality of debt, going forward. After all, as we all know, prevention is better than cure!