Valuation and Maximization in Mergers and Amalgamations under the Insolvency and

Bankruptcy Code (IBC), 2016

Abstract

This research paper delves into the valuation and maximization of assets in mergers and
amalgamations under the Insolvency and Bankruptcy Code (IBC), 2016, in India. It highlights
the legal framework, key provisions, and processes involved in ensuring fair valuation and
maximizing the value of distressed assets. The role of competitive bidding, the Committee of
Creditors (CoC), and the challenges faced in the process are examined, along with implications
for stakeholders. The paper concludes with recommendations for enhancing the effectiveness of
the IBC.

Keywords: Insolvency and Bankruptcy Code, mergers and acquisitions, valuation, asset
maximization, Committee of Creditors, corporate restructuring.

Introduction

The Insolvency and Bankruptcy Code (IBC), 2016, represents a paradigm shift in India’s
approach to corporate insolvency. Designed to consolidate and amend existing laws relating to
reorganization and insolvency resolution, the IBC aims to promote entrepreneurship, enhance
credit availability, and balance the interests of all stakeholders. A critical aspect of the IBC is the
framework it provides for the valuation and maximization of distressed assets through mergers
and amalgamations (M&A). This paper explores the legal provisions, processes, and mechanisms
that underpin these objectives.

Legal Framework and Key Provisions

The IBC provides a structured and time-bound process for insolvency resolution, incorporating
several key provisions to ensure fair valuation and asset maximization:

Section 29A: Eligibility Criteria for Resolution Applicants

Section 29A sets forth the eligibility criteria for resolution applicants to prevent unscrupulous or
incapable entities from participating in the resolution process. Key disqualifications include:

 Willful defaulters.
 Undischarged insolvents.
 Persons convicted of offenses punishable with imprisonment of two years or more.
 Connected persons of the above categories.

Section 30: Submission and Approval of Resolution Plan

Under Section 30, the resolution professional (RP) must ensure that resolution plans:

 Provide for the payment of insolvency resolution process costs.

 Ensure repayment to operational creditors in priority over financial creditors.
 Include measures for the management and operation of the debtor post-resolution.
 Comply with applicable laws.

The Committee of Creditors (CoC) must approve the resolution plan by a vote of not less than
66% of the voting share, ensuring that the plan maximizes value for creditors.

Section 31: Approval of Resolution Plan by NCLT

Section 31 mandates that the National Company Law Tribunal (NCLT) approve the resolution
plan once it has been sanctioned by the CoC. The NCLT ensures the plan complies with Section
30(2) requirements and provides the best possible outcome for creditors and other stakeholders.

Valuation Process Under the IBC

Accurate valuation is critical for fair resolution. The valuation process involves:

Appointment of Registered Valuers

Regulation 27 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations,
2016, mandates the appointment of two registered valuers to estimate the fair and liquidation
values of the corporate debtor’s assets.
Determination of Fair Value and Liquidation Value

 Fair Value: The estimated realizable value of assets if sold as a going concern.
 Liquidation Value: The estimated realizable value if the assets were sold in a liquidation
scenario.
 Confidentiality: These values are kept confidential to ensure an unbiased bidding
process.

Evaluation and Disclosure

The fair and liquidation values are disclosed to the CoC members and used as benchmarks
during the evaluation of resolution plans. This ensures transparency and aids in the fair
assessment of the bids.

Maximization of Value

The IBC promotes value maximization through several mechanisms:

Competitive Bidding Process

A transparent and competitive bidding process is encouraged to attract the highest possible bids
for the distressed assets. The Swiss Challenge Method is often employed to enhance
competition, where the highest bid received is made public, and other bidders are allowed to
match or exceed it.

Objective Evaluation Criteria

The CoC establishes an evaluation matrix outlining criteria such as financial viability, feasibility,
and compliance with applicable laws. This ensures an objective assessment of resolution plans,
aiming to maximize asset value.

Implementation of the Resolution Plan

The successful resolution applicant implements the plan, potentially involving mergers or
acquisitions that lead to operational synergies and value maximization.
Role of the Committee of Creditors (CoC)

The CoC, composed of financial creditors, plays a crucial role in the insolvency resolution
process. Key responsibilities include:

 Approving the appointment of the RP.

 Evaluating and approving the resolution plan.
 Ensuring the resolution plan maximizes value and provides the best outcome for all
stakeholders.

Challenges and Considerations

Regulatory Compliance

Ensuring compliance with multiple regulatory requirements, such as SEBI regulations and the
Competition Act, can be complex and time-consuming.

Valuation Disputes

Disagreements over asset valuation can arise, necessitating transparent and fair processes to
resolve such disputes.

Stakeholder Management

Balancing the interests of various stakeholders, including creditors, employees, and regulatory
authorities, is crucial for a successful resolution.
Case Studies and Judicial Interpretations

To understand the practical application of these provisions, we examine several landmark cases
adjudicated by the NCLT and NCLAT:

Essar Steel India Limited

The resolution of Essar Steel was a significant milestone in the IBC framework, highlighting the
importance of fair valuation and creditor consensus. The Supreme Court upheld the primacy of
the CoC in determining the distribution of proceeds, emphasizing the need for a balanced
approach to maximize value for all stakeholders.

Bhushan Steel Limited

This case underscored the importance of competitive bidding and fair valuation. Tata Steel's bid
for Bhushan Steel, significantly higher than others, demonstrated how competitive bidding can
lead to better realization of asset value.

Electrosteel Steels Limited

Vedanta's acquisition of Electrosteel Steels showcased the effectiveness of the IBC in facilitating
successful M&A transactions, ensuring continuity of operations and maximization of asset value.

Recommendations

Enhance Regulatory Clarity

Simplify and harmonize regulatory requirements to reduce complexity and streamline the
resolution process.

Improve Valuation Methodologies

Develop standardized and transparent valuation methodologies to minimize disputes and ensure
fair assessments.

Strengthen Stakeholder Communication

Foster open and effective communication among all stakeholders to build trust and facilitate
smoother resolution processes.

Conclusion

The Insolvency and Bankruptcy Code (IBC), 2016, provides a robust framework for the
valuation and maximization of distressed assets through mergers and amalgamations. By
promoting competitive bidding, ensuring fair valuation, and involving the Committee of
Creditors in key decisions, the IBC aims to achieve the best possible outcomes for all
stakeholders. However, the successful implementation of these provisions requires careful
navigation of regulatory requirements and effective stakeholder management. Continued
refinement and adaptation of the IBC will enhance its effectiveness in fostering a resilient and
efficient insolvency resolution ecosystem in India.

References

 Insolvency and Bankruptcy Code, 2016.

 IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.
 Companies Act, 2013.
 Income Tax Act, 1961.
 SCC Online: Analysis of Insolvency and Bankruptcy Code cases and judicial
interpretations.
 "Insolvency and Bankruptcy Code: Revolutionizing Insolvency Resolution" by Dr. M. S.
Sahoo, available on SCC Online.
 "The Role of the Committee of Creditors under the IBC: Legal Perspectives and Case
Studies" by NCLT Bar Association.
 "Maximizing Value in Corporate Insolvencies: A Comparative Analysis" by Prof. Rajesh
S. Sharma, published in the Journal of Corporate Law Studies.
  Supreme Court Judgments on IBC: Essar Steel, Bhushan Steel, and Electrosteel Steels
cases available on SCC Online.

By incorporating these references and detailed case studies, this research paper aims to provide a
comprehensive understanding of the valuation and maximization processes under the IBC,
highlighting the strengths and areas for improvement in the current framework.