Govt to relook into insolvency provisions to help bids for smaller companies

Published On: 13, Dec 2017 | Source:

Beena Parmar @BeenaParmar

In order to help smaller companies the government is reviewing the insolvency provisions, including recent amendments barring defaulting promoters from bidding for their own assets undergoing insolvency.

The committee, formed in November and chaired by the secretary, ministry of corporate affairs, and includes members involved in the drafting of the IBC, has already met to discuss the issue, sources told Moneycontrol.

Lawyers, corporates, bankers and other experts have pointed out that the new clause does not distinguish between ordinary and wilful defaulters.

“The prohibition of promoters will reduce the bids coming in especially for the smaller and medium sector enterprises (SMEs). We have been told that a committee is looking at the concerns in the ordinance which have been highlighted by the industry,” one of the banking sources said.

“The problem will not be so much for the large accounts i.e. the first list but for the accounts in the second list, which are smaller assets," another banker said.

Industry experts have also expressed concerns that the ordinance may shut out even clean bidders, possibly those promoters who have blood relations with tainted promoters along with private equity players who typically acquire stressed assets.

Seshagiri Rao, Joint MD & Group CFO, JSW Steel, which is one of the serious bidders in buying the distressed assets undergoing insolvency process said, "If a legitimate promoter whose company went into financial distress due to external reasons, they are also getting debarred from the participation process. However, in my view it will only debar the existing promoters of the NPA accounts at the NCLT. So, there are still others (to participate)."

Sajjan Jindal, Chairman and Managing Director of JSW group had previously pointed out that the ordinance must differentiate between legitimate promoters and willful defaulters while allowing to bid for the assets.

Taking to micro-blogging website Twitter yet again on Tuesday, Jindal, said, “Existing promoters are allowed to be in management in non-NCLT cases with deep debt restructuring involving large haircuts if they are not wilful & non-cooperative borrowers. If so,why to differentiate in #NCLT cases to debar legitimate promoters in bidding process? @arunjaitley."

Rao said they have also pointed there are implementation concerns where once a resolution is accepted, there are many laws which apply and they need to be looked at.

The ordinance bars not only wilful defaulters, but also several other categories of investors such as guarantors to the debtor, those with loans classified as non-performing assets for at least a year, those convicted for any offence with a prison term of more than two years, directors in companies that have been disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.

Speaking to Moneycontrol last month, Jyoti Singh, Insolvency and Disputes Partner at Phoenix Legal, who was a part of three IBC matters, said, "I think it's a very good move to bar fraudulent promoters from bidding and regaining control at a lower value. But, I believe Section 29 A (h) would be challenged since it practically implies that almost 98 percent of the promoters would not be able to submit resolution plan even if they don't fall under other restrictions under newly inserted section 29 A because almost all promoters would have given personal guarantee for securing the corporate lending."

On RBI's directions on June 13, banks have referred 12 large borrowers for insolvency proceedings at various NCLTs in India. The central bank has set a December 13 deadline for the second list of about 28-30 accounts, for which lenders must finalize a resolution plan, failing which they have to take these borrowers to the National Company Law Tribunal (NCLT) by December end.