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Wilful Defaulters To Be Barred From Buying Stressed Assets During Insolvency Action

Cabinet moves an ordinance with changes to the Insolvency and Bankruptcy Code

The shadow of pedestrians are seen on the ground of a crosswalk in Toronto, Ontario, Canada (Photographer: Brent Lewin/Bloomberg)  
The shadow of pedestrians are seen on the ground of a crosswalk in Toronto, Ontario, Canada (Photographer: Brent Lewin/Bloomberg)  

The Union Cabinet has moved an ordinance to bar wilful defaulters from bidding for stressed assets during insolvency proceedings to prevent misuse of India’s latest bankruptcy law aimed at resolving banks’ bad loans.

A wilful defaulter will be “explicitly prohibited” from the proceedings, a government official told BloombergQuint. A person with a history of siphoning off funds or convictions will also not be allowed, according to the recommendations.

A bar on wilful defaulters from bidding for assets being resolved under the IBC will not have a large impact on current cases. Among the 12 large cases being resolved under the bankruptcy code, none of the promoter groups have been labelled as wilful defaulters. The total outstanding loans by such defaulters rose 20.4 percent to Rs 92,376 crore at the end of financial year 2016-17, based on the response to a question in Parliament.

It is unclear whether the Cabinet’s recommendations include a wider bar on defaulting promoters. However, a senior official told BloombergQuint post the Cabinet briefing that the government is not in favour of a 100 percent ban on promoters bidding for stressed assets.

Other Likely Changes In IBC

  • Provide eligibility requirements of a resolution applicant.
  • Committee of Creditors to consider viability of resolution plan.
  • Insolvency and Bankruptcy Board of India to specify further requirements for viability of resolution plan.
  • A new Section providing for punishment for contravention of the provisions where no specific penalty or punishment is provided.

The recommended changes will be done by way of an ordinance, Finance Minister Arun Jaitley told reporters at a press briefing today without giving details. The President’s assent may come later tonight, a senior government official told BloombergQuint requesting anonymity.

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.

Accounts from the first list are now being discussed by the Committee of Creditors and, in some cases, resolution plans by interested parties have been submitted. Among these are cases like Essar Steel Ltd., where current promoters are seeking to get back control of their firms. On Oct. 23, BloombergQuint reported that the Ruia family is among six potential parties interested in Essar Steel.

Given that the resolution process is moving along, it was important to clarify the stance of erstwhile promoters being allowed to participate in the resolution process.

The RBI first initiated a clean-up of bank balance sheets in mid-2015 following an asset quality review. As part of the process, banks were asked to appropriately recognise stressed assets, provide for them and begin resolving them. The recognition process is nearing completion and gross NPAs have risen from Rs 3.4 lakh crore in the September 2015 quarter to Rs 8.4 lakh crore at the end of the September 2017 quarter.

The focus now is on providing for these stressed accounts and resolving them. While the government cleared an unprecedented Rs 2.11 lakh crore bank recapitalisation plan, the resolution is being driven by the RBI, which via an amendment to the Banking Regulations Act, got powers to intervene directly. It was following this amendment that the regulator identified stressed accounts which need to be referred for resolution under the IBC.

Watch this discussion with Saurabh Singh, partner at law firm Khaitan & Co. and Pradeep Kumar former managing director at State Bank of India on how the Cabinet’s recommendations can ease insolvency proceedings.