12A OR 29A – A ‘CON’ OR AN ‘ANTA’?

Looks like 12A has become a thorn in the bush for the insolvency agencies.

12A refers to a rule in the insolvency books – a deal put out by the promoters at a price which is higher than the liquidation amount.  

Videocon Group promoter Venugopal Dhoot has approached an appeals court against a June insolvency tribunal order that cleared the resolution plan of Vedanta group firm Twin Star Technologies.

When the bid from Twin Star was put for a vote in December, more than 95% of the lenders backed the deal at Rs.2900 crore, for taking over 13 Videocon companies. These 13 companies owed Rs.61,773 crore to various banks and as against this, the banks were willing to take a 95% haircut.

Agreed that the objective of the NCLT is to prevent liquidation at any cost but 13 companies being sold off at less than Rs.3000 crore?

Dhoot, in October had submitted a proposal to repay Rs.31,789 crore over a 10-year period but this was rejected by the lenders – this rejection was under the Section 29A of IBC, which does not allow defaulting promoters to regain control over their firms.

So, now we have a tussle between 12A and 29A. Banks can legally withdraw NCLT cases and accept a one-time settlement offered by the promoters but this in complete contradiction to the 29A which bars promoters from bidding for the same assets. But what truly separates the two – 12A is good to go if the bid from the promoter comes before getting the resolution plans of other applicants while 29A disallows promoters from putting forth resolution plans after the bids are placed.

Thus in case of Videcon, the committee of creditors (CoC) could reject the request of Dhoot though he is offering to pay more, merely on the grounds of 29A. But then pops up the curious case of Siva industries, where, because there were no bids, the banks allowed the promoter, C Sivasankaran to take back his company by paying just Rs.500 crore as against the debt he piled up of Rs.5000 crore.

This was a very bad precedent as it incentivizes defaulters – they get back their company at a dirt cheap price after defaulting on loans worth millions. The Siva Industries case was a blotch on responsible banking.

In case of Videocon, the bid has already come in and approved, albeit at a throwaway price for Vedanta. Here the question is whether to follow the law and disallow Dhoot from getting a back-door entry or pay attention to the anomalies mentioned in Dhoot’s petition and settle for a much higher amount (10x more than Vedanta’s offer).

Yes, it is also very strange that the very same promoters who defaulted are now lining up to pay up – if they had the money why did they default at all?

What is also truly questionable is that when NCLT approved Vedanta’s bid of June, the NCLT also evinced surprise that the bid value is so close to the liquidation value – fair value arrived at the registered valuers was Rs.4069 crore while liquidation value was placed at Rs.2568 crore; Vedanta’s bid was at Rs.2962 crore. So, one cannot help but wonder whether the confidentiality clause was adhered to in this case?

This entire Videocon-Vedanta case looks murky, opening up too many questions than provide any resolution.