By Stuart Burns
We have written before about the principal of unintended consequences. Governments, companies and people do things often for the best reasons, but do not foresee occasionally tragic - but more often unfortunate - consequences.
Well, India's recent amendments to the Insolvency and Bankruptcy Code (IBC) have not only practically debarred promoters from reacquiring their own assets, but the intended action has also put the world's largest steelmaker ArcelorMittal's (NYSE:MT) prospective bid for stressed steel assets (namely Bhushan Steel, Bhushan Power & Steel, and Essar Steel) in jeopardy, the Indian Business Standard reported last week.
Firstly, the act - as the paper explains, a new Section 29A of the IBC, rules that a person and therefore company in which they are involved shall not be eligible to submit a bid for a distressed company if they are an undischarged insolvent. This prohibits promoters or sister concerns of companies with non-performing assets (NPAs) of more than a year from bidding for these companies. This quite rightly stops the practice of putting an asset into insolvency to lose its debts, only to pick it up for a song from the administrators and start again without the debt.
The problem for ArcelorMittal is that in 2009 the firm picked up a stake in Uttam Galva Steels. The idea was to pave the way for the global major's entry into India. The glitch is that last September, according to the report, Uttam Galva Steels was classified as an NPA, which means that it's been more than a year since the account became an NPA and bars ArcelorMittal from participation in the auction.
Of the 12 companies that the Reserve Bank of India mandated India's commercial banks to refer to bankruptcy courts, the first batch includes Essar Steel, Monnet Ispat, Bhushan Power & Steel, Bhushan Steel, Electrosteel Steels, Alok Industries, Amtek Auto, Jaypee Infratech, Lanco Infratech, Jyoti Structures, ABG Shipyard, and Era Infra, the Economic Times reports.
Steelmakers are likely only interested in the three steel producers: Bhushan Steel, Bhushan Power & Steel, and Essar Steel.
With steel demand rising rapidly, Indian assets should have potential and with ArcelorMittal's experience, deep pockets and technology, the firm makes a natural buyer; significantly better to have a trade buyer than private equity or a conglomerate - of which India has many - without the deep subject matter experience in turning around steel plants.
The authorities no doubt realize this and will be working behind the scenes to find a solution.
One option suggested is that a resolution is found to the bankrupt firm Uttam Galva Steels that is the cause of the firm's debarring.
Ironically, Uttam Galva Steels is on the list for the second round of forced auction. However, some are asking if Arcelor couldn't, or wouldn't, turn around Uttam Galva Steels, then why should they be given the chance to bid to do the same for this new batch of assets?
A fair question, indeed.