Insolvency and Bankruptcy Code: There are glaring problems and it isn't only about low valuations

Valuers have a greater role to play in asset valuation rather than in share valuation.

S Murlidharan August 20, 2018 08:19:06 IST
Insolvency and Bankruptcy Code: There are glaring problems and it isn't only about low valuations

Of the 40 largest NPA accounts sent to various National Company Law Tribunals (NCLTs) since last July, which together constitute around 40 percent of over Rs 11 trillion worth of bad loans, only seven had been resolved so far, where the banks took an average haircut of over 60 percent since some accounts such as Alok Industries were bid out for only 17 percent of the money owed to lenders.

It is against this backdrop that the government is mulling strengthening the valuation process by empowering and educating chartered accountants and company secretaries under a separate law.

The government it seems is missing the wood for the trees. It is common self-deprecating humor in Chartered Accountant (CA) circles that CAs are not valuers though they are intimately connected with values. In any case, while there can be a fiscal law like the Income-Tax Act that makes a valuer’s valuation binding subject to appeal, there cannot be a law that can possibly make valuations binding in a bidding process for sale of an undertaking except that it may serve as a reserve price. But then this is not going to improve or shore up the fortunes of companies before NCLT under the Insolvency and Bankruptcy Code 2016 (IBC). Bidders are not going to be swayed by official valuations. They often make a meal out of creditors’ desperation.

The key then is to make the bidding process more robust and participative so that the realisations are greater than hitherto entailing a much less haircut. A 60 percent haircut that the cognoscenti is philosophically resigning itself to is unacceptable because that would, in the long run, make lending in general and banking in particular unviable.

There must be continuous competitive bidding as opposed to one-time bidding presented by way of a sealed quotation. Continuous competitive bidding allows one to keep on revising his bids in response to competition. This results in a better price discovery. One also should not be unduly moralistic about who all can bid so long as they are ready to cough up the moolah.

Insolvency and Bankruptcy Code There are glaring problems and it isnt only about low valuations

Representational image. AFP.

Those who brought about the ruination of a debtor-company should not be allowed to bid is the rationale behind the prohibition on promoters and their associates' bidding. But a dispassionate look at the issue would show that one should not cut the nose to spite the face. Let the company law and benami law worry about the need for punishing crooks including by way of disgorgement of funds diverted from the debtor-companies.

Under the IBC-NCLT scheme of things, the sale of controlling interest to bidders is the only mode of getting money for distribution amongst secured creditors. The government and the RBI seem to be more interested in cleaning up the balance sheets of banks as if a squeaky clean balance sheet is the panacea for all its ills. Nor can ousting the erring promoter and replacing him with a new one be considered a sufficient punishment for his wayward ways.

Therefore, if at all the law is amended it should be to mandate on NCLT to explore other possibilities that would heighten the recoveries for all stakeholders. Share valuation any day gets entangled in myriad factors. The future earning potential, which is one of the key methods, stares at the volatile and unpredictable future. Yet, it is given the maximum weightage by valuers.

The sum of the sale price of individual assets is the least volatile and easily predictable method. Yet, it is given the least weightage. Value of prime lands, for example, gets buried under the weightage given for future earnings. Therefore, NCLT must use its discretion to decide which course would yield the best results. A real estate company might be interested in the prime lands of the company but not in acquiring controlling interest therein. Valuers have a greater role to play in asset valuation rather than in share valuation.

Valuation skills and norms should be beefed up only if the IBC is going to give up its fixation with the sale of controlling interest in debtor-companies. And if this change is on the cards, then not only chartered accountants and company secretaries must be educated and empowered but also chartered engineers who are in a better position to value plant and machinery and other physical assets.

(The author is a senior columnist and tweets @smurlidharan)

Updated Date:

also read

Don't use NCLT on daily basis to resolve stressed assets: Union minister Anurag Thakur
Business

Don't use NCLT on daily basis to resolve stressed assets: Union minister Anurag Thakur

The government on Wednesday asked banks to put in all efforts to resolve bad loans themselves and approach National Company Law Tribunal (NCLT) only in the absence of any alternative

SBI chief: Insolvency & Bankruptcy Code Ordinance to have no impact on valuation of assets under resolution
Business

SBI chief: Insolvency & Bankruptcy Code Ordinance to have no impact on valuation of assets under resolution

New insolvency law will make ineligible those who have their accounts classified as non-performing assets for one year or more

Gujarat HC order on Essar Steel is good news but hope of defusing bad loan bomb by 2019 is wishful
Business

Gujarat HC order on Essar Steel is good news but hope of defusing bad loan bomb by 2019 is wishful

There isn’t the required infrastructure in place as of now to initiate a large number of bad loan cases, involving huge amounts, where no significant repayment has been made for years