About 30 million tonnes of steel is lying under bankruptcy proceedings in India, and is waiting to be taken over by new management under the Insolvency and Bankruptcy Code, 2016 (IBC). The battle for these facilities has seen several companies hotly contesting with one another for the win. Where the applicable thresholds were breached, approval was also required from the Competition Commission of India (CCI/ Commission). Earlier, this could potentially wait until the IBC process was completed and a clear front runner emerged. However, due to an amendment to the law in August 2018, it was made mandatory that approval of the CCI is obtained prior to the approval of a resolution plan by the committee of creditors (CoC). This has, or will in the near future, create a unique situation that the CCI will have to deal with.
The IBC was enacted by Parliament to ensure timely resolution of insolvent companies by placing them under temporary management of an independent professional, and inviting willing suitors to submit their resolution plans for the insolvent company. Several steel companies quickly found their way before the relevant National Company Law Tribunal (NCLT), the authority overseeing the process and stamping its final approval. The IBC mandates a 180 day period which is extendable to 270 days for the completion of the resolution process. However, it has been finding it hard to stick to the prescribed time-frame owing to the litigation initiated by ousted promoters or losing bidders, and courts still settling certain substantive issues.
Prime examples of this are the insolvency proceedings in the case of Essar Steel India Limited (ESIL) and Bhushan Power and Steel (BPSL). Though insolvency proceedings were initiated for both companies more than 15 months ago there is no resolution in sight and neither has any final liquidation been made.
The role of the CCI
The CCI has the power to unconditionally approve, conditionally approve, or prohibit combinations, depending on the likely appreciable adverse effect (AAEC) of the transaction, on competition in the relevant markets in India. When faced with transactions involving IBC companies, it has taken special care to approve the transactions as soon as possible given the intent behind the strict timelines under the IBC.
The Commission, of late, has been assessing combinations in the steel sector, passing successive orders approving the transactions relating to companies under the IBC process. During the current fiscal alone, the Commission has unconditionally approved Tata Steel Limited's acquisition of 75% or more of the total equity share capital of Bhushan Steel Limited (BSL), as well as approved AION Investment (AION) and JSW Steel Limited's acquisition of Monnet Ispat and Energy Limited (Monnet) on 25 April 20181 and 11 May 20182. On the same day, 11 May 2018, the Commission has also approved Vedanta's acquisition of Electro Steels Limited. On 06 August 2018 and 18 September 2018, the CCI approved Tata Steel's proposed acquisition of BPSL as well as ArcelorMittal India Private Limited's (AMIPL) proposed acquisition of Essar, India's fourth largest steel maker.
A brief snapshot of the CCI's assessment in each of these is provided below:
- Tata Steel/
The Commission examined the market on the horizontal overlaps between the parties that existed in the following finished flat carbon steel products:
- Hot rolled coils and sheets and plates;
- Cold rolled coils and sheets;
- Surface coated products (including galvanized products and colour coated products);
- Flat steel tubes and pipes (including precision and non-precision tubes).
- AION / JSW Steel/
While approving the combination, and holding that the horizontal overlaps were not likely to cause AAEC, due to the presence of various non-integrated or secondary steel producers, the Hon'ble Commission analyzed the overlaps in the manufacture and sale of:
- Pig iron;
- Sponge iron;
- Semis (specifically Billet/ Blooms);
- Long Products – TMT Bars.
- Vedanta/ Electro
The Hon'ble Commission approved Vedanta's acquisition of 90 percent of equity share capital of ESL, finding that the combined market share of the Parties in the market for manufacture and sale of pig iron is not significant and that there are other existing players in the market such who will give competitive constraints to the Acquirer.
- Tata Steel/
Subsequently, in yet another race to acquire insolvent steel entities/ companies, Tata Steel approached the Commission on 02 July 2018, seeking the approval of the Hon'ble Commission in relation to the acquisition of up to 100 per cent of the total issued and paid up share capital of Bhushan Power and Steel Limited. BPSL was also undergoing insolvency resolution proceedings initiated under the Insolvency and Bankruptcy Code, 2016 and the Commission unconditionally granted its approval to the said transaction on 06 August 2018, finding that despite horizontal overlaps in the market of flat carbon products, the presence of several competitors continues to exert competitive constraints on the Tata Steel.3
- ArcelorMittal/ Essar
The Hon'ble Commission has also approved the acquisition of Essar Steel India Limited, which was engaged in the manufacturing and sales of various steel products including hot rolled products, cold rolled products, coated products, etc., by AMIPL, in accordance with the provisions of the IBC. The Commission, considered the relevant markets and unconditionally approved the said transaction on 18 September 20184, finding no appreciable adverse effect on competition, due to the presence of several competitors.
JSW also threw its hat in the race for BPSL in August, post the amendment to the IBC and secured approval on 18 September 20185, with the CCI finding that the combined entity was not likely to have the ability or incentive to foreclose any market for competitors, thereby not likely to have an appreciable adverse effect on competition.
Though the IBC mandates a maximum period of 270 days for the completion of the resolution process, the litigation initiated by the erstwhile promoters and interested bidders has derailed this.
The corporate resolution insolvency process for Essar began in August 2017. Resolution plans were submitted by AMIPL as well as Numetal. However, in March 2018, both the bids were declared ineligible by the Resolution Professional under Section 29A of the IBC and both the entities were asked to submit fresh resolution plans. Fresh bids were submitted by these two companies as well as by Vedanta Resources Ltd in April 2018. The NCLT declared both bidders ineligible. Appeals were filed before the National Company Law Appellate Tribunal (NCLAT), which allowed the CoC to take into account the bids submitted provided the ineligibility was cleared. Finally, the Supreme Court, on 04 October 2018 found both AMIPL and Numetal to be ineligible and granted one last opportunity to both the resolution applicants to clear their ineligibility and resubmit their resolution plans. On 17 October 2018, AMIPL paid INR 74.69 billion to the banks and on 19 October 2018 it was declared the highest bidder for ESIL, more than 400 days after it first submitted its bid. However, the final outcome is still unclear with both Numetal and the former promoters having approached the CoC with fresh proposals.
In yet another similar situation, the corporate insolvency resolution process for BPSL began in July 2017. Bids were submitted by Tata Steel, JSW and Liberty House in February 2018. Litigation ensued and is currently pending before the NCLAT. Though 90% of the banks have voted in favour of JSW's revised bid, even after 400 days since the NCLT ordered insolvency proceedings, there doesn't seem to be any clarity on who the final winner is likely to be.
The contention that follows
As is evident from the above, the Commission has most generously been passing its orders of approval, finding no appreciable adverse effect in the steel sector. It is important to consider that certain transactions, despite receiving the Commission's approval may have not been effectuated, since the acquiring entities may yet to be declared the highest bidder/ yet to receive the approval of the committee of creditors for their respective acquisitions of the insolvent target companies. In such a situation, while one company awaits to be declared the winner, they, in the interim are not prevented from running for another insolvent steel company. In simpler words, acquirer company 'A', having received the Commission's approval, (but not yet declared the highest bidder) for insolvent company 'B', may approach the Commission and file its notice for the acquisition of yet another insolvent company 'C' in the same sector. Thus, what this entails is that in a separate race, company A is free to run for another insolvent company like C and will have to approach the Commission for its prior approval, as made mandatory subsequent to the amendment in the IBC.
What the Commission will now be faced with is a delicate situation. It will be borne with the task of assessing company A's acquisition of insolvent company C while it is still unclear whether A would finally acquire B or not. It is thus unclear how the Commission will perceive such a situation. It is undecided whether:
- It will consider the transaction to be company A's acquisition of insolvent company C (without including the market shares of company B), as despite getting the approval for company B from the Commission, in effect, company A is yet to acquire B for want of approval of the committee of creditors (CoC)/ being declared the highest bidder under the IBC proceedings; or
- Will it consider company A to include company B (as company A has previously received approval from the Commission for acquisition of insolvent company B and assume that it will be the final winner) while assessing the transaction for acquisition of insolvent company C.
The Commission has not yet been faced with such a scenario. With the Indian steel consumption likely to grow, the battle for the bankrupt companies will intensify. Potential suitors will grab this opportunity in order to acquire a bigger share of the steel market as steel prices have evidently been on a rise. Along with this, even creditors will finally have a ray of hope to be repaid and, given the amendment to the IBC, it is highly likely that the Commission will stumble upon the situation where acquirer company A would knock its doors for acquisition of more than one insolvent company. At that stage, adopting any of the two scenarios to resolve the contention at hand, seems to be putting the Commission in a fix.
Therefore, given the uncertainty in who will eventually win the bid for which insolvent entity, the Commission may deem it appropriate to conduct a two-pronged analysis – (a) considering A as a stand-alone entity and (b) assuming B to a part of A. No doubt the CCI would lean in favour of the latter. The problem arises due to the fact the result may be poles apart. While looking at A alone along with C, the CCI may find that no AAEC arises and therefore be willing to unconditionally clear the transaction while on the other hand, may raise concerns when B is added to the mix, which may result in the CCI requiring modifications to be made to the transaction.
Whether the Commission passes an order that encompasses both possible outcomes is an open question, but one that it may have to decide very soon. The pragmatic approach would suggest that it must be read into the scheme of the legislation. The other option would be to pass two separate orders, which again would raise the same legal questions.
1.* Prerna Parashar is an Associate in the Competition Law Practice Group at L&L Partners Law Offices. She graduated from Amity Law School, Delhi in 2016 with a degree in B.A.,LL.B. (Hons.). At the Firm, she has been engaged in various complex competition law litigations, mergers as well as leniencies across various sectors. She has represented clients engaged in various fields including pharmaceuticals, automotive industry, auto parts, aviation etc. before the Competition Commission of India, National Company Law Appellate Tribunal, High Court of Delhi as well the Supreme Court of India. She can be reached at firstname.lastname@example.org.
Combination Registration No. C-2018/03/562 https://www.cci.gov.in/sites/default/files/Notice_order_document/Order%20-%2025.04.2018.pdf
2. Combination Registration No. C-2018/05/03/561
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