Two years after US-based Piramal Group and Oaktree Capital bid each other for control of bankrupt Dewan Housing and Finance (DHFL), a similar bidding battle has erupted over Reliance Capital. In auctions to date, the main contenders include the Torrent group, the Hinduja group, Oaktree Capital and a partnership between Cosmea Financial Holdings and Piramal Enterprises.
Valuation reports by Duff and Phelps and RBSA Advisors peg the liquidation value of Reliance Capital at โน12,500 crore and โน13,200 crore respectively. On 21 December 2022, it was first reported that Torrent had emerged as the highest bidder with a bid of Rs 8.64 billion, closely followed by Hinduja with Rs 8.15 billion. However, things turned around when Hinduja gave the lenders at Reliance Capital a revised offer of approximately Rs 9.5 billion, including a cash component of Rs 8.8 billion, one day after the auction concluded. With Hinduja sweetening his offer (after the deadline), both lenders and bidders have been left in a procedural mess.
Why are they training?
The market capitalization of Reliance Capital is reported to be Rs 284 crore. So why the fight over the low-value company? Bidders are offering more than Rs 8,000 crore for an insolvent company because it would give them the chance to get multiple licences, regulatory permissions and a company that has the potential to go live. For investors, this would mean opening gateways to new trading channels without the hassle of obtaining permits. For example, Reliance Capital owns Reliance General Insurance and Reliance Securities, which may allow bidders to enter the insurance and financial services market.
'Challenge Mechanism'
One of the central principles for insolvency resolution is the โmaximization of valueโ of the corporate debtor. The resolution of insolvency of companies is governed by the provisions of the Insolvency and Bankruptcy Code (IBC) and the rules of the Insolvency and Bankruptcy Board of India (IBBI). Once the Corporate Insolvency Resolution Process (CIRP) begins, a resolution professional invites resolution plans from eligible applicants. The call for resolution plans often contains detailed terms and conditions for applicants.
To maximize the value of the corporate debtor's assets, the resolution professional may use a "contest mechanism" to allow applicants to improve their plans. In the challenge mechanism, potential applicants submit their offers and resolution plans, which are then evaluated by creditors.
In the case of Reliance Capital, four rounds of the challenge mechanism were held, after which the highest bid of Rs 8,640 crore was received from Torrent on December 21, 2022.
However, in the settlement plan finally submitted to the challenge mechanism administrator, the Hinduja group had revised its offer to over Rs 9,000 crore.
The Torrent Challenge
On January 10, 2023, it was reported that the Reliance Capital lenders had decided to hold a second round of auction. This would nullify the current offerings from Torrent and Hinduja. The base price for the second auction was reportedly set at โน9500 crore, which includes initial cash of โน8000 crore.
Torrent filed an application with the National Company Law Tribunal (NCLT), Mumbai Bench, challenging the Hinduja group's allegedly illegally modified resolution plan. Torrent argued on the basis of procedural correctness. He submitted multiple documents and/or communications to demonstrate that no changes to the finalized financial proposal were allowed.
The NCLT, according to Torrent, observed that the approval of a resolution plan could not be delayed forever under the pretext of maximizing value. Consequently, the NCLT did not allow the Hinduja group to deviate from its offer of Rs 8,110 crore.
The Hinduja group, for its part, filed an appeal with the National Company Law Appeals Tribunal (NCLAT). On February 21, 2023, it was reported that the appeal hearing had concluded, reserving the matter for the record.
drawing the line
The creditors' decision to proceed with a second auction was evident given the bidding wars that had erupted and the fact that the bid value was still much less than the liquidation value. However, the Reliance Capital case underscores the need to review the current legal regime related to insolvency resolution and, more specifically, the challenge mechanism under the IBC.
While value maximization is an important goal, it is not the only one. Furthermore, in the exercise of its commercial wisdom, the creditors' committee must refrain from acting arbitrarily. Organizing multiple auctions, backed by overzealous attempts at value maximization, can only reduce the value of the corporate debtor's assets.
(The writers are barristers in Trinity Chambers, Delhi)
