Chances are you probably don't read a lot of positive content on the internet. It's not (entirely) your fault though - humans have a strong "negativity bias." It's not a new phenomenon either - this knowledge has been exploited by news and media organizations for a very long time. Of course, the exponential growth of social media platforms and widespread internet access means raw exposure to negativity is growing at a terrifying rate.
The stressed asset / insolvency space in India is not immune to negative press either. We tried a simple google search by typing "IBC Success." There was no positive search result and instead we found this towards the top:
The article itself is eye-opening and informative with objective analysis of raw data (Here's the link to the full story, it's definitely worth a read).
The success of India's Insolvency and Bankruptcy Code is not written about enough. Through our lens as a support entity (in the successful resolution of National Steel and Agro Industries Limited), this is a content-heavy and comprehensive case study of a remarkable success story we are proud to be a part of!
The phrase "the proof is in the pudding" is an abridged version of the original: "The proof of the pudding is in the eating" which begins to make more sense. To put it succinctly, judgment should be reserved until one has direct experience. And that brings us to the primary objective of this case study - A glimpse into the real world of IBC through the lens of an Insolvency Professional.
Join us in taking a bite out of this pudding. The pudding is baked perfectly well, but if your goal is to be the best pudding in the world, you will need to do a bit more work! The good news is that the regulator's actions and approach suggest that is the eventual target - to be recognized globally as best-in-class. The journey won't be easy, but IBC is definitely "trending upward."
Alright - on to the case study!
Transaction Summary
National Steel and Agro Industries Limited ("NSAIL") was a public limited company and a ‘Fortune 500’ listed company in India. Primarily known for its flat steel products, the Company also had an agriculture vertical. NSAIL's insolvency commencement date was April 11, 2022 wherein our Group Chairman - Mr. Dushyant C Dave - was appointed as the Insolvency Professional. Mr. Dave appointed his support entity (group company and IBBI registered IPE M/s. Decode Resolvency International Private Limited) and took charge by deploying a dedicated team with local presence (at-site in Indore) as well as resources deployed at NSAIL's head office (in Mumbai).
Within 45 days, the Company reversed its negative EBITDA and started showing signs of revival. The JSW Group played a key role in keeping the Company afloat and running as a going concern in the years preceding insolvency by entering into a “Job Work” arrangement with NSAIL. The plant was operational with skeletal leadership and a lack of efficient/skilled management as on April 11, 2022. Apart from JSW Job Work, the Company also manufactured goods for other customers either directly through sale mechanisms or through Job Work with other parties to maximize production.
The impact of short-term measures undertaken by us was immediate and tangible. The Company reversed its downward trending EBITDA from negative $0.19M in March 2022, to positive EBITDA of $0.244M within 60 days. These numbers further improved by 330% (3.3x) within the first 90 days. By the completion of around 100 days, NSAIL had recorded an EBITDA of $0.645M and PBT of $0.17M. Other medium-term measures (3-9 months) were implemented that resulted in a direct impact on the bottom-line. The cost of goods sold reduced by 4% in a period of 8 months, and the EBITDA margins increased from -2% in April 2022 through to 12% in January 2023. The overall production increased by about 58% during our tenure and the current assets position increased from $0.3M to about $2M during this period as well.
In IBC, the common approach is that the Board of Directors do not have any role since their powers are suspended. However, there is another key aspect to this law - while the powers are suspended, they are also to be exercised by the Insolvency Professional. Hence, the Board is not dissolved - it is only their powers that are suspended and exercised by the Insolvency Professional.
In a first, Mr. Dave promoted a Senior Vice President and inducted a new member to the Board while also appointing him as the designated Factory Occupier. This proved extremely effective in raising employee morale, improving productivity, and establishing rapport with all employees. It also ensured that there was accountability and responsibility within the organization
To infuse confidence among all stakeholders, meetings were organized with vendors, clients, KMPs, HR, and all department heads. Strained relationships were mended when they were in the Company’s interests while new relationships were forged if so required. The appointment of trained and seasoned personnel with the right network in the steel industry were crucial in this process.
These numbers were achieved in spite of a sudden change in government policy wherein the export duty for the Company’s products was increased from 0% to 15% in May 2022 (within the first 45 days of our tenure). To put the impact of this policy change in perspective, exports declined by more than 50% YoY and by July 2022, India had became a net importer of steel instead of a net exporter. The prices of products that the Company produced fell by around 30%. Such companies undergoing insolvency proceedings usually require interim financing due to the credit cycles and status of vendor relationships. The Company was successfully run as a going concern at close to 100% capacity without any such interim financing raised.
By the 179th day, a Resolution Plan submitted by a wholly owned subsidiary of the JSW Group – a $25B conglomerate where the subsidiary is India’s largest manufacturer in the Company’s industry – had been tabled and approved by the Committee of Creditors. The total plan value was about ~INR 620 crore; equivalent to 180% of the Company’s Liquidation Value. By ensuring that the Company operated at close to 100% capacity throughout the duration of the insolvency proceedings, Mr. Dave and his team helped facilitate maximization of value for the creditors’ committee with payments to the secured creditors, unsecured creditors as well as all the employees and workmen in an equitable and fair manner.
Setting the Stage
Let's start with a video - drone based footage of the steel manufacturing plant:
NSAIL's corporate insolvency resolution process commenced on April 11, 2022 and apart from the roles and duties prescribed in law, we prioritized creation of this video. We highly recommend such informative videos that include text overlays, flows/journeys and asset overviews in a way that is easy to share. To maximize value in stressed asset transactions, it is important to be a great sales person! When pictures say a thousand words, a video can show a million pictures. Sure, these aren't easy to create - a lot of work will go behind the scenes - but it is absolutely worth it.
The reality is that this should be the norm from a basic cost-benefit analysis. If asset inspection is limited to static content and site visits, you have probably not been able to cast the net wide enough. Not all eligible buyers are able to schedule site visits without one round of deal/asset filtering.
A video will ensure your assets do not slip through a potential buyer's first elimination round which significantly improves your conversion ratio.
When the time came to publish Form G (inviting potential resolution applicants to submit their interest), we were ready with a set of investor material that helped us hit the ground running - one pager, email cascades, information memorandum, this video, on-site trained personnel available on short notice for site visits, and training of department heads on communication skills necessary when interacting with potential buyers.
Business is personal - a video and a process is a great starting point to create personal connections with buyers.
Transaction Timeline - Approved Resolution Plan in 180 days
The entire NSAIL CIRP was conducted as per the model timeline prescribed in law. Insolvency Professionals are prescribed 180 days from the data of commencement to file an "approved resolution plan" with the Adjudicating Authority (the Honorable National Company Law Tribunal or "NCLT").
Most of the concerns with respect to the success of IBC revolve around the fact that it takes "too long." However, this is a case of expectation management and not a judgment on the law itself. How should one determine what timeframe is considered as "too long?" Everyone who is practicing insolvency (has "eaten the pudding") is fully aware that the 180 days window is an aggressive timeline. In 2015, prior to the introduction of IBC, the average time for resolution stood at 4.3 years. By 2019, within three years, the average time was already significantly better due to IBC and stood at 1.6 years. An Insolvency and Bankruptcy Board of India ("IBBI") research paper in 2021 references a World Bank statistic by saying:
However, we still have a long way to go as the best regulatory performance in resolving insolvencies is 0.4 years (Ireland).
So, it is clear that the resolution period is reducing due to the introduction of IBC. Now, we are trying to optimize and improve performance to reduce it even further with the Ireland target in our sights. With the NSAIL CIRP, we were able to meet all of the timelines because of a truly team effort by numerous stakeholders. Here are some key dates alongside the model timeline prescribed:
The facts around every case are different that can result in delays that are beyond the Insolvency Professional's control. However, some element of innovation - done in good faith - can truly change the game for you in an assignment. However, there is a surprisingly limited number of dialogue around soft skills that cannot be prescribed or taught - it must come from experience and from a resolution-driven mindset.
If Insolvency Professionals had additional tools in their box such as conflict management, negotiation, team building, human capital, stakeholder communication and behavioral psychology, perhaps they would not need to resort to the tried-and-tested litigative/legal route every time they were faced with a problem/dilemma. Often, IPs err on the side of caution because there is significant accountability for each decision where a legal opinion/order validates a decision. Of course, there are instances where legal remedies are the best course of action and we cannot afford to "over-generalize," but the overall point still stands where litigation must be used only as a last resort.
This is also why there is now a push towards arbitration and mediation mechanisms. A high-performing team takes effort. It requires ownership and buy-in towards a common, shared goal among all stakeholders. With NSAIL, we were lucky to be guided and driven by large reputable organizations (such as JSW Group and JM Financial) with seasoned professionals forming part of the team. That is another aspect that must not be taken lightly - the involvement of the right people, at the right time, in the right manner is crucial to the success of such a transaction. For various reasons, many creditor committee meetings are not fruitful and that leads to inordinate delays. All members involved must have a common goal at a high-level (successful resolution) as well as at granular levels (like individual CoC meeting targets).
Summary of Steps Taken
Necessary steps were taken to improve the efficiency of the equipment and the result was that in January 2023, during the insolvency proceedings, the company produced 30,165 metric tons of hot rolled coils - highest in the company's 30 year history.
Here are some of the steps and actions undertaken over the course of the CIRP:
Deployment of an 8-person Interim Management Team
Revamping security protocols/systems
Asset Preservation activities such as tagging, tracing, regular physical verification, timely renewal of insurance, maintenance and planned shutdowns to avoid any unacceptable wear and tear, renewals of expiring trademarks, analysing value of intangible assets, identifying the gaps in the IT framework and data
Revising purchase and sales policies towards improving credit cycles and maximizing proceeds from sale of goods
Using an e-auction platform for sale of products to increase transparency and create competition
Creation, modification and adherence of various SOPs with buy-in and ownership from relevant functional heads and departments.
Minimize Inventory holding cost by liquidating all sellable products in a timely manner
Systems for monitoring production and dispatch through daily MIS and variance analysis
Maintaining and monitoring the costing records of the Company by putting in place a robust process to understand product-wise profitability.
Dedicated legal and compliance officers made an integral part of the Interim Management.
Efforts for recovery of dues by utilizing aging concepts and using different strategies based on the amount receivable and contextual analysis of the party from whom recovery is anticipated.
Liaison with the government/regulatory authorities have required effective negotiation skills and deputation of resources with the necessary skillset to achieve a beneficial outcome.
Marketing and Sales: Revamped the structure and conducted a buyer-onboarding process with sale strategies designed to increase competition and maximize sale proceeds.
A concurrent audit system was put in place to monitor production and cash flows.
HR: The HR function was weak and additional support and training was imparted to the HR team on a constant/regular basis. Various incentive programs were re-instituted to increase engagement and morale.
Purchasing: The vendor selection, RFQ and negotiation policies were revised. Payment terms were re-negotiated. Vendors that had stopped supplying to the Company were also approached with a clear communication that all of their dues are protected and shall be paid in full.
Plant hygiene, cleanliness, beautification efforts were undertaken and successfully completed.
Safety was given a priority and necessary training and communication was imparted in this regard.
Quality – Quality of products is improved and the rejection rate from the customers has decreased significant.
All occasions, cultural activities, and celebrations for the well-being of employees and laborers have continued to happen.
Regular feedback and surveys have been conducted with 1:1s conducted with every single person on the Company’s payroll.
Avoiding Avoidance
An Insolvency Professional is required to report “Avoidance Transactions” if he determines any such transaction has taken place in the preceding months (such as preferential, undervalued, fraudulent, extortionate). We identified one such transaction where a payment was made to a related party of the Company. Under the provisions of the Law, the Insolvency Professional may file an application seeking directions from the Honorable NCLT. We noted that the Insolvency Court has the power to reverse a transaction. However, this would require significant time, resources and delay to the process. Since the reversal of the transaction was the best case scenario, we preferred to initiate a dialogue between the Company’s promoters and the related party involved. These efforts, with crucial support and cooperation from the erstwhile management/promoters, culminated in the entire payment that was made to the related party being reversed and returned back to NSAIL.
Resolution Plan Specifics
Here are some salient points of this resolution plan:
Total Plan Value: ~$80M; representing a total recovery to the creditors committee at a value representing 180% of the Company’s Liquidation Value.
Commitment to infuse additional capital of ~$3M for short-term use to de-bottleneck capital expenditure
Payment of all insolvency process costs in full and in priority
Payment to all operational creditors is higher than what such creditors may have realized in case the Company was liquidated/dissolved; further, to support MSMEs and other operational creditors, the payments to such creditors is proposed in priority to the secured financial creditors.
Plan contains information regarding how the affairs of the Company shall be managed after approval from the Adjudicating Authorities; this is required to ensure there is continuity and prospects of maintaining going concern status in the long-term.
Existing issued, subscribed and paid-up equity share capital of the Company will be entirely reduced without any consideration
The Company shall be merged with the subsidiary after delisting, capital reduction, loan conversions and extinguishing public shareholding in the enterprise.
A clean slate – all financial liabilities written off in full by virtue of the order from the Adjudicating Authority approving the Plan.
The entire Plan is implemented within 30 days from the date of approval from the Adjudicating Authority.
Avoidance Transactions are eligible to be continued in parallel with benefits, if any, accruing to the financial creditors for any such recoveries for the first two (2) years
A specific statement has been inserted in the Plan that states that the Plan is unconditional in nature, that the source of funds is defined (JSW Group) and that the Plan shall not be modified after approval from the Adjudicating Authority.
While simultaneously introducing better practices and systems in the company, we have focused on the culture and working environment throughout the process. The presence of a high-functioning team has been noticed and remarked positively upon by the CoC as well as the Successful Resolution Applicant. We also utilized the time period between CoC approval and NCLT approval by coordinating in various areas to facilitate a smooth and quick transition.
Closing Thoughts
It takes a village...
The transaction has also been recognized by TMA - a global organization for turnaround as the best "Mid-Size Turnaround and Transaction of the year" for 2023 (Read more about this award here).
Without cooperation from the promoters, active engagement of the CoC, deployment of a trained and dedicated team, under the stewardship of Mr. Dushyant C Dave and the JSW Group, this transaction does not become a success.
If you are here, thank you for taking the time out of your schedule to read through this success story of National Steel - "The National Story."
This transaction helps reinforce the notion that the resolution of a Company through the Insolvency Court is heavily dependent on the credibility and approach adopted. We were able to convey that it is critical to facilitate information symmetry and open dialogue as the key pillars on the basis of which speedier resolutions can take place. It helps the regulators and the government make the case that the model timeline is realistic and achievable.
Managing a group of 1100+ employees/workmen having different backgrounds, identities, experiences and perspectives requires a leadership that is sensitive and leads by example. The Interim Management and the Company’s leadership embraced diversity across the board with key stakeholders and management coming from different age groups, ethnicity, religion, region, and expertise. All decisions were based on factual data with no sign of biases or preferences coming into play. In isolated instances where any exclusionary conduct was observed, we chose to educate and re-train the people involved towards objective decision making by helping them identify their biases in real-time.
We encouraged respectful dialogue and listened actively to different perspectives. It helped us resolve ground-level problems in an amicable manner and gain confidence from all stakeholders. We made attempts to ensure that all team members of the Company felt valued, respected, and empowered to contribute to the team's success.
The different expertise and diversity that we brought to the table as a team enabled us to do justice to the project. We tried to lead by example in fostering open communication while training the teams not to avoid conflict. We helped mediate differences by focusing on the problem statement and driving constructive change. We also helped teams understand that as a feature of such projects, they needed to operate and thrive in uncertain environments.
We look forward to seeing tremendous growth in the sequel in The National Story - now a part of the JSW Family!
About Us
The Decode Group is a growing network of companies facilitating business transformation. Our vision is to reimagine how organizations operate and are specialists in change management. Our mission is to contribute effectively in India's growth story through transformational projects that positively impact Human Capital.
Have questions or want to explore synergies? Write to us at hello@thedecodegroup.com or check out our website.
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