Risks and Strategies of Bankruptcy M&A: An Indian Perspective

Transcription

1 Risks and Strategies of Bankruptcy M&A: An Indian Perspective Mohit Saraf Senior Partner Luthra & Luthra Law Offices Asia M&A Forum 2009: Opportunities in Distress March 4, 2009

2 SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985 ( SICA ) SICA provides for revival/ rehabilitation of sick industrial companies. To fall under the purview of SICA: A company should be engaged in any scheduled industry (i.e. any industry specified in First Schedule to Industries (Development and Regulation) Act, Scheduled industries include metallurgical industries, telecommunication, transportation, chemicals, textiles but not financial services and software technology. Criteria of sickness - Such company should have at the end of any financial year accumulated losses equal to or exceeding its entire net worth. Once a company becomes sick, the board of directors should make a reference to Board for Industrial and Financial Reconstruction ( BIFR ). 2

3 ELEMENTS OF REORGANISATION PROCEEDINGS UNDER SICA Automatic Stay comes into play once an inquiry is initiated by BIFR in the concerned company. BIFR may direct any operating agency (primarily public institutions) to prepare a scheme of rehabilitation for the company. The scheme may, inter-alia, provide for Financial reconstruction of the company. Proper management of the company. Amalgamation of the company with another company. Possibility of winding-up in case it is determined that the sick company cannot be revived. 3

4 CONCEPT OF POTENTIALLY SICK INDUSTRIAL COMPANIES Potentially sick industrial companies - Accumulated losses of an industrial company at the end of any financial year, have resulted in erosion of fifty per cent or more of its peak net worth during the immediately preceding four financial years. Company is required to report fact of such erosion to BIFR. BIFR may call for such information from the company as it may deem fit. BIFR may recommend winding up of the company. 4

5 SHORTFALLS OF SICA Provisions of SICA have been misused by companies to come within the purview of sickness. Automatic Stay sometimes used as a weapon to avoid payment to creditors. Reference to be made after erosion of net worth sometimes too late a stage for revival. Sickness not linked to inability to pay debts. Past records not encouraging Till 2005, out of 5327 cases registered with BIFR, only 504 have been revived and 270 are under revival. In 1311 cases, winding up has been recommended. 5

6 CHANGES PROPOSED IN THE REGIME REGULATING SICK COMPANIES Amendments yet to take effect in Companies Act, 1956 Sickness is proposed to be linked to inability to pay debts along with erosion of net worth. Board of directors/ creditors may also submit a scheme for rehabilitation. Concept of automatic stay is proposed to be done away with. 6

7 CHANGES PROPOSED (Cont..) Changes proposed under the Companies Bill, 2008 Criteria of sickness to be related to inability to pay debts due to secured creditors representing 50% or more of the outstanding debt. Application for determination of sickness may be filed either by the creditor or the company. Special majority of creditors to decide on the winding up or revival of the company. Revival scheme required to be approved by the requisite majority of creditors. No automatic stay on proceedings. 7

8 WINDING UP OF A COMPANY IN INDIA INVOLUNTARY WINDING UP BY COURT PROCESS ON A PETITION OF CREDITORS Both secured and unsecured creditors may file a petition for winding up the company before the High Court. Petition may be presented by creditors on various grounds including the inability of the company to pay its debts. In certain circumstances, the law presumes that the company is unable to pay it debts, (e.g. when the company neglects to pay a creditor for three weeks after he makes a demand for Rs. 500 or more). Also other grounds exist on which the creditors may file the petition. 8

9 WINDING UP (Cont..) AUTOMATIC STAY (in involuntary winding up) Prior to a winding up order being made, an application has to be made to the concerned Court for retraining of proceedings against the company. Once a winding up order is made, automatic stay comes into play for staying of proceedings against the company. 9

10 WINDING UP (Cont..) VOLUNTARY WINDING UP May be of two types - 1) Members voluntary winding up; 2) Creditors voluntary winding up. Members voluntary winding up arises when declaration of solvency is made by the company. Creditors voluntary winding up arises when no declaration of solvency is made by company. In creditors voluntary winding up, power to appoint the liquidator rests primarily with the creditors. AUTOMATIC STAY (in voluntary winding up) Automatic Stay per se does not exist in voluntary winding up. Application has to be made to the concerned Court for exercise of its powers for staying of proceedings against the company. 10

11 BANKRUPTCY WATERFALL Secured creditors may realize their security (subject to pro rata charge in favour of the workmen) Priority 1: Workmen dues; and the portion of dues to secured creditors, which could not be realized by them by virtue of a statutory charge in favor of workmen on their security, enforced by the liquidator. Priority 2: Revenues, taxes etc. due from the company; and salaries and other dues of employees. Priority 3: Unsecured creditors Priority 4: Shareholders participate in the surplus. 11

12 POSITIVE FEATURES IN INDIAN LEGAL REGIME FOR M&A IN DISTRESS Provisions under the Companies Act, 1956 Sections 391 to 394 of the Companies Act, 1956 may be used for entering into compromises/ settlement with creditors, and amalgamation/ merger with other companies. Central Government may (with the approval of the Company Law Board) take steps for removal of directors, appointment of other persons as directors on the board of a company, when in best interest of such company. THESE POWERS HAVE BEEN RECENTLY USED IN THE CASE OF SATYAM. Such steps may substantially improve the chances of revival of a company. 12

13 POSITIVE FEATURES (Cont..) Relaxation from the provisions of the Takeover Code SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 ( Takeover Code ) apply to acquisition of shares in listed companies in India. However, the provisions of the Takeover Code, such as making of an open offer by the acquirer for purchase of shares, pricing norms, etc. do not apply to Acquisition of shares pursuant to a scheme framed under SICA. Acquisition of shares pursuant to a scheme of arrangement/ reconstruction under any law, Indian or foreign. Government has recently amended the Takeover Code, so as to allow easy acquisition/ takeover of companies in situations like SATYAM (i.e. companies whose board of directors have been superseded by the Government). 13

14 POSITIVE FEATURES (Cont..) Bail Out Takeovers Special provisions in the Takeover Code for substantial acquisition of shares in a financially weak company, not being a sick industrial company. Criterion for determination of financially weak company - a company, which has at the end of the previous financial year accumulated losses, which has resulted in erosion of more than 50 per cent but less than 100 per cent of its net worth as at the beginning of the previous financial year. A scheme of rehabilitation is approved by a public financial institution or a scheduled bank ( the lead institution ) for such financially weak companies. The acquirer is selected by the lead institution on the basis of bids received, and such acquirer acquires the shares in the company. 14

15 RECOMMENDATIONS OF HIGH LEVEL COMMITTEES FOR REVISION OF BANKRUPTCY LAWS IN INDIA Recommendations of the Justice V.B. Eradi Committee on law relating to insolvency of companies (2000) Setting up of a National Tribunal for revival/ rehabilitation and winding up of companies. Adoption of UNCITRAL Model Law for Cross Border Insolvency. Need to encourage voluntary winding up of companies. Criteria of sickness of companies should also include inability to pay debts. 15

16 RECOMMENDATIONS (Cont..) Recommendations of the JJ Irani Committee on Company Law (2005) The forum overseeing the insolvency process should have the expertise to deal with the specialized, commercial and technical characteristics of insolvency law. National Company Law Tribunal to be set up on a speedy basis. The test for insolvency should prescribe for default in payment of matured debt on demand. Debtors should approach the Tribunal with a rehabilitation scheme. Creditors should also propose scheme of rehabilitation. 16

17 CHALLENGES TO TAKEOVER OF DISTRESSED INDIAN COMPANIES THROUGH INTERNATIONAL M&A TRANSACTIONS No full capital account convertibility. FDI is prohibited/ restricted to certain levels in certain sectors. In case of listed companies, specific approval of RBI required for transfer of shares from residents to non-residents, if the Takeover Code gets triggered due to acquisition. Requirements of the Takeover Code (including pricing norms) to be adhered to in case of acquisition of listed Indian companies (where the Takeover Code gets triggered). In case of acquisition of unlisted companies/ listed companies where Takeover Code does not get triggered, pricing norms prescribed by RBI to be adhered to. 17

18 CHALLENGES TO TAKEOVER OF DISTRESSED FOREIGN COMPANIES BY INDIAN COMPANIES Total financial commitment of the Indian Party in Joint Ventures/ Wholly Owned Subsidiaries abroad cannot exceed 400 per cent of the net worth of the Indian Party. Acquisitions not permitted in real estate business or banking business. Valuation norms as prescribed under Foreign Exchange Management Act, 1999 and regulations framed thereunder have to be complied with. 18

19 EXAMPLES OF BANKRUPTCY M&A TRANSACTIONS Sterlite may acquire Asarco for around $ 1.5 billion. Sterlite Industries, the flagship firm in India of the London-listed Vedanta group, may close the acquisition of US copper miner Asarco at around US$ 1.5 billion. Asarco is in Chapter 11 bankruptcy proceedings in the United States. In May 2008, Sterlite had emerged as the lead bidder with a $2.6 billion offer to buy Asarco s operating assets. The current credit crisis and the sinking copper prices have forced Sterlite to revise the offer. If the deal materializes, Sterlite will become the world s third-largest copper miner with a combined capacity of 650,000 tonnes a year. However, all of Asarco s interests are in the United States, which is not somewhere that Vedanta has operated before. 19

20 EXAMPLES (Cont..) Reliance acquired FLAG Telecom for around US$ 211 million. United States based FLAG Telecom started in 1990 as leading provider of international wholesale network transport and communication services with under sea cables of 50,000 Km. In 2001, FLAG filed for a bankruptcy under Chapter 11 of the Bankruptcy Code in the United States and in 2002, it emerged out of bankruptcy. In January 2004, Reliance Infocom acquired FLAG Telecom for a valuation of US$ 211 Million. From loss making subsidiary in 03-04, FLAG broken even in September 06 and contributes to 25% of Reliance Communication business. (Cont..) 20

21 EXAMPLES (Cont..) Strategic Acquisition- Entry into digital infrastructure business of FLAG later helped Reliance s entry in remote storage, ethernet, bandwidth leasing, IP services, etc. So, Reliance could offer entire portfolio of services under one umbrella. 21

22 THANK YOU Luthra & Luthra Law Offices 103, Ashoka Estate, 24, Barakhamba Road, New Delhi Tel: + (91) (11) Fax: + (91) (11) [email protected] 22