Information Memorandum, Valuation and Invitation of Plans

A rescue under the Code depends on finding a buyer who will pay a fair price for the business. Bidders need reliable information, creditors need an independent estimate of what the business is worth, and the process needs a fair, competitive procedure for receiving and comparing offers. This note explains the information memorandum, the valuation of the corporate debtor, and the regulated process of inviting expressions of interest and resolution plans.

1. The Information Memorandum, Section 29

• Section 29(1). The resolution professional prepares an information memorandum in the form and manner specified by the IBBI, containing the relevant information needed to formulate a resolution plan.
• Section 29(2). The professional provides access to all relevant information, physically and electronically, to the resolution applicant, if the applicant undertakes to comply with confidentiality and insider trading laws, to protect the intellectual property of the corporate debtor, and not to share the information with third parties except as permitted.
• Timing. Under the model timeline, the memorandum is submitted to the committee of creditors within 54 days of the commencement date (Topic 32)

Figure 1: Contents of the information memorandum (Regulation 36)

2. Valuation

• Regulation 27. The resolution professional appoints two registered valuers within the time specified, ordinarily within seven days of his appointment and in any case by the forty-seventh day, to determine the fair value and the liquidation value of the corporate debtor.
• Registered valuers. Valuers registered with the IBBI as the authority under the Companies (Registered Valuers and Valuation) Rules, 2017, who must be independent of the debtor and the professional.
• Regulation 35. The fair value and liquidation value are taken as the average of the two estimates; where the two estimates differ significantly, a third valuer may be appointed and the average of the two closest estimates is used.

Figure 2: Two measures of value

• Use of liquidation value. It fixes the minimum that operational and dissenting financial creditors must receive under a plan (section 30(2)(b)), and helps the committee decide whether resolution is better than liquidation.
• Confidentiality. The fair value and liquidation value are given to members of the committee only after resolution plans are received, on an undertaking of confidentiality, so that bidders cannot anchor their offers to the liquidation value.
• No minimum price. A plan need not offer at least the liquidation value or fair value; the committee may accept a lower offer in its commercial wisdom (Maharashtra Seamless, 2020; Topic 28)

3. Inviting Prospective Resolution Applicants

Figure 3: From invitation to plans

• Section 25(2)(h). The resolution professional invites prospective resolution applicants who fulfil the criteria he lays down with the approval of the committee, having regard to the complexity and scale of operations of the business.
• Form G, Regulation 36A. The invitation for expressions of interest is published in Form G, ordinarily by the seventy-fifth day, on the debtor's website, the IBBI's website and in newspapers, stating the eligibility criteria and the last date for submission, at least fifteen days later.
• Eligibility criteria. Usually relating to net worth, assets under management, experience in the sector and similar factors; they must not be unduly restrictive, so as not to exclude genuine bidders.
• Lists. The professional issues a provisional list of eligible prospective resolution applicants, considers objections, and then publishes a final list.
• Section 29A check. Each prospective resolution applicant must submit an affidavit that it is not ineligible under section 29A, and the professional conducts due diligence (Topic 38)

4. The Request for Resolution Plans, Regulation 36B

• Contents. The request for resolution plans is issued with the information memorandum and the evaluation matrix, setting out the requirements a plan must meet.
• Evaluation matrix. The parameters, approved by the committee, against which plans are scored, such as the amount offered, the upfront payment, the source of funds, the business plan, and the treatment of stakeholders.
• Time. Applicants receive at least thirty days to submit plans.
• Performance security. The request requires the successful applicant to furnish a performance security, which is forfeited if it fails to implement the plan or contributes to its failure (Topic 45)
• Improving bids. The committee may adopt a challenge mechanism, such as a Swiss challenge or a round of revised bids, to give applicants a chance to improve their plans, provided the process is fair, transparent and disclosed to all applicants.

5. Frequently Asked Questions

Why is the liquidation value kept secret from bidders?

Because a bidder who knows it would tend to offer just above it, rather than the business's real worth. Disclosing it to the committee only after plans are received encourages bidders to make their best offer.

Can the resolution professional set strict eligibility criteria for bidders?

He sets them with the committee's approval, having regard to the size and complexity of the business. Criteria that are arbitrary or designed to exclude genuine bidders may be challenged before the NCLT.

What is the difference between fair value and liquidation value?

Fair value is what the assets would fetch in an arm's length sale between willing parties on the commencement date. Liquidation value is what they would realise if the company were liquidated on that date, and is usually lower.

6. Related Topics

• Topic 38: Section 29A. Ineligible resolution applicants.
• Topic 40: Section 30. Contents of a resolution plan.
• Topic 41: Treatment of Operational and Dissenting Creditors. The liquidation value minimum.