India is mineral rich, with the mining sector a powerhouse contributing INR913 billion (USD12.3 billion) to GDP. However, this sector, which is integral to government plans to revive the economy, has profitability problems. Falls in steel prices, the Supreme Court decision that coal block allocations are illegal, demonetisation and the goods and services tax roll-out have affected the viability of mining companies. These factors, coupled with delays to government projects, huge cost overruns, large debts, delays in recovery and operational difficulties have increased concerns over the liquidity of companies, ultimately driving them towards default.
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Lakshmikumaran & Sridharan
The Insolvency and Bankruptcy Code, 2016 (IBC) enables investors to inject funds and acquire control of such troubled companies and their distressed mines. With the successful acquisitions of Essar Steel by ArcelorMittal, Bhushan Steel by Tata Steel, Bhushan Power and Steel by JSW Steel and Electrosteel by Vedanta, the IBC has benefited mining companies burdened with distressed assets, creditors and resolution applicants.
Companies owning mining concessions have high value even if they are financially troubled. That value is not lost even when a company can no longer pay its debts. The IBC allows the easy purchase of existing mining companies, while ensuring their recovery and transfer as going concerns. The insolvency resolution process forgives existing debts and allows companies to start with a clean slate. The reduction of debt through significant haircuts reduces debt ratios for prospective buyers.
Acquiring an existing company is better than investing in a greenfield project. The acquiring company avoids the long process of obtaining mining concessions and the work up to full production. Purchase through the IBC ensures investors are aware of challenges and potential gains, in contrast to bidding for licences through open auction with associated uncertainties and risks. Investors can assess challenges, strategise and bring in relevant expertise. They have the benefits of a ready workforce and contracts with existing customers.
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Lakshmikumaran & Sridharan
Regarding mining leases, the IBC prohibits the termination or suspension of concessions during the resolution process, provided current debts are paid. Thus, stressed mines are good options for resolution applicants looking to invest and gain market share. Players gain ownership and control of high-value but troubled companies more quickly. Insolvent companies, burdened by huge loans, poor management and unfavourable market situations benefit from the expertise, experience, talent, and funds of resolution applicants. This mechanism helps resolution applicants find ready to go assets in companies that align with their core business and accelerate their growth.
Recent amendments to mining laws allow the smooth implementation of resolution plans. The Minerals (Other than Atomic and Hydro Carbons Energy Mineral) Concession Rules, 2016, now permit the transfer of letters of intent issued at auction for the grant of mining leases or licences, provided such transfer is necessary for the successful conclusion of insolvency, liquidation, or bankruptcy proceedings.
Amendments to the Mines and Minerals (Development and Regulation) Act, 1957, permit captive mines to sell 50% of their yearly production after meeting the captive requirement, remove end-use restrictions and allow the unlimited use of statutory permits and licences by a new lessee on transfer. These changes have made the mining sector more investor-friendly.
Acquisitions of defaulting companies at highly discounted prices have enabled corporate houses to grow larger, but have driven smaller competitors out of the business. The resolution process makes companies available at a fraction of their original investment prices and new management does not have to recoup the costs of setting up a plant. Most acquisitions through the insolvency process involve a small number of large conglomerates. This concentrates business and economic power in a few hands. Even the banks burdened with bad debts offer loans only to the few.
Despite the pitfalls and myriad legal hassles faced by acquiring companies, the IBC route is the best option for distressed mines and the mining industry. The successful implementation of recent resolution plans shows a positive trajectory.
Charanya Lakshmikumaran is a partner and Ishita Mathur is a principal associate at Lakshmikumaran & Sridharan
Lakshmikumaran & Sridharan
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India
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