Economic Survey: Banning Promoters Under New Bankruptcy Law Was Warranted
Economic Survey 2018: Banning promoters from insolvency proceedings necessary.
The government’s decision to bar certain promoters from bidding for their own assets under the Insolvency and Bankruptcy Code may have been necessary, the Economic Survey for 2017-18 said.
The decision was important “to minimise moral hazard going forward; otherwise firms would have an incentive to default on their loans, then offer to repay them at a discount”, Chief Economic Adviser Arvind Subramanian wrote.
This, according to the survey, can lead to a situation of moral hazard, where incompetent or fraudulent promoters are effectively rewarded with the control of their company, leaving creditors to write off their debts. The new bankruptcy law thus seeks to enable the lenders to avoid imprudent transactions, while also zeroing in on the best available resolution plan for the company, the survey said.
But it carried the possibility of fewer bidders and lower prices in the auctions of insolvent firms.Economic Survey 2017-18
Analysing the insolvency process, the survey said that over the last year, the infrastructure surrounding it has grown manifold. The code was approved in November 2016. Banks have been using it to resolve large-value non-performing assets since June 2017, when the Reserve Bank of India asked them to admit 12 cases immediately. Since December, banks have also started the process of admitting another 25 cases, which formed the RBI’s second list of stressed accounts.
According to the data provided in the survey, nearly 1,300 insolvency professionals are registered with the Insolvency and Bankruptcy Board of India. The first information utility had also started working.
As per the data available, 525 companies have been admitted under the IBC since the creditors started using it. Of this, the corporate insolvency resolution process was under progress in 451 such cases. Steel with 45 cases and construction with 40 cases led the list of sectors, which have seen an increased number of companies under insolvency.
The National Company Law Tribunal benches across the country had approved 10 resolution plans and passed 30 liquidation orders against the cases admitted.
A major factor behind the effectiveness of the new code has been the adjudication by the judiciary. The code prescribes strict time limits for various procedures under it. In spite of the large inflow of cases to NCLT benches across India, they have been able to admit or reject applications for corporate insolvency resolution admissions with few delays.
“In addition, appellate courts, including the NCLAT (appellate tribunal), high courts and the Supreme Court have also disposed appeals quickly and decisively. In this process, a rich case-law has evolved, reducing future legal uncertainty.”