Essar Steel Judgement Discussion by panel

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Essar Steel Judgement Discussion by the panel
Excerpts from the interview of Mr Rashesh Shah, Chairman and CEO, Edelweiss Financial Services; Mr Arijit Basu, MD, State Bank of India; Mr Bahram Vakil, founding partner, AZB & Partners; and Mr Shardul Shroff, executive chairman Shardul Amarchand Mangaldas & Co and dated 18^th November 2019. Source: Livemint

The Supreme Court’s judgment awarding Essar Steel Ltd to Arcelor Mittal has strengthened the Insolvency and Bankruptcy Code, empowered the committee of creditors and set a precedent for other similar cases, participants at a panel discussion said. 

Mr Rashesh Shah, Chairman, and CEO, Edelweiss Financial Services: Edelweiss Asset Reconstruction Company (ARC) has over ₹ 7,000-8,000 crs of exposure in Essar Steel Ltd.

• According to him, it will take a couple of weeks for the recovery to come through.
• Edelweiss ARC will receive 25% of the payment while the balance will go to the respective banks.
• According to him, the important thing is not only Essar Steel judgement, but there are at least another 8-10 cases which are also hinging upon the same principles which were raised on the Essar Steel case and those will also quickly get released.
• He thinks between now to March 2020, there is a fair amount of liquidity that will get released in a lot of these NCLT cases because of the clarity of the judgement and the clarity on the grounds on which how all these NCLT cases will be resolved.
• Edelweiss is expected to receive the money in two-three weeks’ time. This will require some paperwork, to make sure that due process is followed in allocation to avoid any kind of missteps in execution. This account is a large one with payment of almost US$6 billion.

Mr Arijit Basu, Managing Director SBI: State Bank of India (SBI) was to get around ₹ 12,000 crore

• Mr Basu said, “We are working on the process, we would like things to move very fast now that everything has been now cleared by the Supreme Court. Let us see how it goes, I think the expectation is that things should move very fast.”
• According to him, it is not just about Essar Steel but he feels that this judgement will bring in finality to the entire NCLT and the IBC process as was set up in 2016.
• Various NCLT and NCLAT courts were giving diverse judgments and were leading to a lot of confusion.
• The previous ruling of the Supreme Court: the amendments brought by the government in the IBC code itself now and this final judgment will lay down not only the rules for Essar Steel but will also give a very clear idea as to how everyone has to move forward including the committee of creditors.
• Mr Basu thinks that an assessment has to be made which SBI is trying to work out of course regarding how much of more such cases are exclusively dependent on clarity coming in the NCLT process and how much of it is due to other delays which are happening because of the resolution process itself. So, maybe in a couple of days, SBI will be able to frame that.

Bahram Vakil, founding partner, AZB & Partners:

• He said, “23^rd October 2018 was when National Company Law Tribunal (NCLT) Ahmedabad approved it. So it is not a small amount of time, I have not done the internal rate of return (IRR) calculation, but we have lost from October 23 till November 15, so just over a year if they had accepted it then.”
• Recovery rates have been doubled from 25% to 46%, this judgement will probably take it to 48-49%, but the best in class worldwide is in the 80%.

Mr Shardul Shroff, executive chairman, Shardul Amarchand Mangaldas & Co.:

• The NCLAT has to go both by letter of the law and the spirit of the law. It is unequivocally clear that the Supreme Court has reiterated the fact that the decision of the Committee of Creditors (CoC) is final, they have the primacy and there is no authority in law for the NCLAT to substitute the judgement of the CoC by their own judgement.
• According to him, now the question which will survive if at all is that if the CoC has made a decision which is contrary to the IBC, therefore for example if they have miscalculated the liquidation value or if they have not followed the requirement of ensuring that the operational creditors get the first bite at the cherry, those kinds of things if they are wrongly done by the CoC, those are the issues which will go by remand.

Consensus Estimate (Source: market screener website) 

• The closing price of Edelweiss Financial Services Ltd was ₹ 129/- as of 18-November-19 and traded at 1.5x /1.3x /1.3x the consensus BVPS for FY20E / 21E / 22E of ₹ 85.7/95.7/102.0 respectively. Consensus target price of ₹ 157/- implies a PB multiple of 1.5x on FY22E BVPS of ₹ 102/-.
• The closing price of State Bank of India Ltd was ₹ 325/- as of 18-November-19 and traded at 1.3x /1.2x /1.0x the consensus BVPS for FY20E / 21E / 22E of ₹ 251/280/319 respectively.