During the week, the NCLT instructed the COC or Committee of Creditors of Dewan Housing to reconsider the bid by DHFL promoter, Kapil Wadhawan. How good an idea is that and why such a strategy could well have been avoided.
Setting the wrong precedent
Promoters bidding for their bankrupt companies is nothing new or unheard of. People like Vijay Mallya and the Ruia brothers tried to get back their business by settling with the banks for a haircut. In both the cases, the Committed of Creditors or COC had flatly rejected the offer. The argument was that allowing a promoter to re-enter the company by purchasing back ownership at a lower price sets a bad precedent. Even when the NCLT process was put in place, one of the tacit points agreed upon was that defaulting promoters would be barred.
Under these circumstances, the NCLT asking COC to look at Kapil Wadhawan’s bid for DFHL is rather strange. If Kapil really wanted to negotiate a deal with the banks, he had a fairly big window of over a year when he could have done a deal with the banks. The fact that he did not do it, clearly implies that there was really no intent to repay the creditors or the banks. Kapil Wadhawan’s bid is well above the accepted bid of Piramal but it is not clear where the funds would be arranged from. If the funds were there, then why was there a default. It raises too many uncomfortable questions.
Let us respect the mandate
The entire idea of allowing Wadhawan to bid for Dewan Housing after Piramal won it through competitive bidding is not a great idea. It defeats the very sanctity of the NCLT process, which has worked very well in cases like Essar Steel and Bhushan Steel, among others. The Wadhawan bid looks more like an attempt to delay the entire process and perhaps wait for a situation where PEL loses interest in the target company. Let us also not forget that DHFL is not just a company that went bankrupt due to business downcycles. The promoters of DHFL, including Kapil Wadhawan, have been found guilty of money laundering and that is a serious charge. This NCLT order just disrespects the NCLT process.
What is a better way?
Should promoters be totally banned from the NCLT process? Not exactly. In fact, promoters can be allowed where the bankruptcy was due to business risk like demand and supply cycles. Another case where promoters can be allowed to bid is when the current promoter brings a specific and unique skill to the table, in which case, such bids can be allowed. However, the best way would be to give greater and a more structured leeway to banks to strike haircut deals with the defaulting promoters. One rule should be the wilful defaulters and promoters guilty of money laundering be surely barred from NCLT bidding process!