After bankruptcy, now Bhushan Steel’s net worth turns negative
In what might be bad news for lenders trying to salvage their loans to Bhushan Steel Ltd, the distressed steelmaker has reported a negative net worth as on 31 March 2017.
The company, one of the 12 identified by the Reserve Bank of India (RBI) to be referred to the National Company Law Tribunal (NCLT) for the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), reported a slightly higher consolidated revenue for the full year (2016-17) late on Wednesday. But losses of ₹3,440.5 crore during the year and the IndAS (Indian Accounting Standard)-mandated treatment of preference shares as a liability means that its net worth stood at a negative ₹1,484.2 crore as on March 31 from a high of ₹9,226.3 crore on March 31, 2013.
A negative net worth (book value or shareholders equity) is a sign of deep distress.
This will not make much difference to lenders converting their loans to the company to equity— for listed companies such conversion under schemes such as the strategic debt restructuring (SDR) is done on the basis of their share price and not book value. Still, experts are of the opinion that the erosion of a company’s net worth indicates that there’s nothing much left to salvage from it.
“A lot of money needs to be put into a company that has eroded its net worth, in order to strengthen its balance sheet. More importantly, you need to put in place a new strategy to revive the business,” said Gaurang Shah, vice-president, Geojit BNP Paribas.
Essar Steel Ltd, another of the 12 firms, that approached the Gujarat High Court against its lenders’ decision to go ahead with proceedings under the IBC, had a net worth of ₹4,617 crore as on March 31, 2016 (more recent numbers are not available). That contrasts with Unity Infraprojects Ltd, which is not one of the 12 companies, but which has voluntarily approached NCLT, asking that bankruptcy proceedings be started under the IBC, according to a banker who asked not to be identified.
In general, when a company has a positive net worth, lenders stand a chance of recovering something from it under IBC. When it has a negative net worth, there’s little they can recover, and the bankruptcy process could well end up protecting the promoters to some extent.
“After we decided at the last consortium meeting to initiate recovery proceedings against Unity Infraprojects, the company itself pleaded to the NCLT to direct us to start bankruptcy proceedings under the IBC, thereby thwarting our recovery plans,” said the banker mentioned earlier.