Will Putting Promoters In A Spot Strengthen Insolvency Law?
IBC ordinance will ensure that promoters do not misuse the mechanism, say experts and bankers.
With the amendments to the Insolvency and Bankruptcy Code, promoters of defaulting companies will be encouraged to take timely action as they stand the risk of losing assets, bankers and lawyers told BloombergQuint.
“The intention is clear. If you have non-performing assets, start on their resolution immediately," said VG Kannan, chief of the Indian Banks’ Association, in an interaction with BloombergQuint. The existing promoters will now be “hard-pressed” by the changes made to the code, he added.
The amendments say that those whose accounts have been non-performing for a year will not be allowed to participate in the resolution plan. Those who have not have settled overdue amounts on the said accounts will also not be permitted, said another provision within the amendments. An ordinance to amend the IBC was passed by the President earlier today.
A change in the code comes at a time when about 50 of the India’s biggest defaulting companies face insolvency proceedings. In June, the RBI had identified 12 large accounts, which made up 25 percent of the banking system’s gross non performing assets, and asked banks to refer these for resolution under the IBC. It then came out with a second list with another 30-40 companies. The RBI has given banks until Dec. to try and come up with a resolution plan, failing which these firms, too, must be taken to bankruptcy court.
The newly introduced provisions indicate that promoters of at least the first list of 12 large cases referred to the IBC under direction by the RBI would not be allowed to bid.
Here's what law experts and bankers BloombergQuint spoke made of the changes.
‘Strict Stance’
The government has taken a strict position with this amendment as it “tries to knock off anybody who has taken advantage of the banking system, and also has been fraudulent,” said Shardul Shroff, corporate lawyer and executive chairman of law firm Shardul Amarchand Mangaldas & Co.
Through these changes, the government is looking to test “viability and feasibility” of potential buyers, he added.
The principle of the government is that they want people who’ll run the stressed assets in a viable manner and not just the same people who’ve been running it into the ground.Shardul Shroff, Executive Chairman, Shardul Amarchand Mangaldas & Co.
It will be difficult for promoters to challenge this in the Supreme Court since “sympathy” would be against them, Shroff pointed out.
If a person is the cause of injury for the banking sector, would it not be prudent to keep such a person out?Shardul Shroff, Executive Chairman, Shardul Amarchand Mangaldas & Co.
Shroff added that the promoters who have not yet submitted a resolution plan, will have a window to pay the overdue amount and participate in the bidding.
‘Greater Seriousness’
The amendments will bring in “greater seriousness on the part of the promoters” as they risk losing control of their stressed assets, former deputy governor of the Reserve Bank of India, R Gandhi, said.
Earlier, promoters have been sitting pretty thinking that the asset is theirs forever. Now, the seriousness has been brought on which will bring good behaviour from promoters.R Gandhi, Former RBI Deputy Governor
The changes will not hurt the resolution processes already in place or the creditors ability to recover their money, Gandhi explained.
‘Not Fair’
Some of the biggest corporate revivals in India have been backed by promoters who had defualted, said Abizer Diwanji, Partner and Head- Financial Services, at EY.
We all thought IBC was a way to truly correct these balance sheets but this is not a fair way to look at things.Abizer Diwanji, Partner and Head- Financial Services, EY
Diwanji argued that including a promoter in the bidding process would “drive people to bid to the maximum extent possible ad stretch down the replacement value against sustainable debt”. However, if the promoter is out of the race, even genuine bidders keep their bids low which affects banks’ recovery, he added. He expects the amendment to get challenged.
‘Step In The Right Direction’
The amendments are a step in the right direction as they bar a majority of the people “who’ve played the system” right away, said G Padmanabhan, non executive chairman of Bank of India.
This had to happen. It doesn’t make any sense for this entire detailed exercise (insolvency process) to take place if eight of the ten companies go back to the same promoter.G Padmanabhan, Non-Executive Chairman, Bank of India
According to Padmanabhan, the ideal way to do this would've been to complete the process of declaring wilful defaulters aggressively before the making changes. “As of now, banks have been reluctant to declare list of wilful defaulters, because the moment you do so the chances of recovery are trimmed,” he said.
Padmanabhan said that even though the amendments “look aggressive”, there had to be a starting point for this. He added that the changes will keep evolving in the future.