What good is a government drive to deal with the Rs 10 trillion of toxic assets (bad loans and restructured loans) choking the banking system if the same promoters and wilful defaulters responsible for bankrupting a company get a chance to return to the helm? At a hugely discounted price at that. President Ram Nath Kovind on Thursday gave his assent to ordinance amending Insolvency and Bankruptcy Code (IBC).
Take the case of Essar Steel, which is facing insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) with a default of Rs 37,284 crore. Its promoters have openly bid for the assets of its 10-million-tonne plant in Hazira, Gujarat, along with a Russian partner, VTB Bank. Another controversial example is Synergies Dooray Automotive Ltd, the first case resolved under IBC. Back in September, Mint reported that the resolution plan for Synergies Dooray involved merging the company with a creditor and related party, Synergies Castings Ltd, holding 75% of debt of the defaulter. Synergies Casting transferred a significant chunk of loans to a non-related party called Millennium Finance Ltd. Edelweiss Asset Reconstruction Co. had appealed against the resolution claiming that this move enabled Synergies Castings to put in place a proxy in the creditor committee.
The criticism against this loophole in the IBC further peaked earlier this month, when Rajnish Kumar, chairman of State Bank of India, claimed that promoters of companies facing insolvency and bankruptcy proceedings are within their rights to bid for their own assets.
Against this backdrop, the Insolvency and Bankruptcy Board of India (IBBI) issued a notification on November 7, amending the corporate insolvency resolution process regulations. The revised regulations ensure that applicants, including promoters, are put to a stringent test with respect to their credit worthiness and credibility, prior to the approval of a resolution plan. Henceforth, the resolution applicants' details in terms of "convictions, disqualifications, criminal proceedings, categorisation as wilful defaulter as per RBI guidelines, debarment imposed by Sebi, if any", would have to be disclosed, according to a statement by IBBI. This move will go a long way in preventing promoters from using shell companies to regain control of their defaulting companies.
At the same time, the government recognised that the IBC needed to be amended since the curbs on promoters bidding would not hold up in court. So, yesterday, the Union Cabinet cleared the ordinance-currently awaiting presidential assent-for making amendments in the IBC to prevent willful defaulters from bidding for stressed assets. The government opted for the ordinance route weeks before the winter session of Parliament as some defaulting cases are likely to come up for resolution soon.
According to the Hindu Business Line, as per the proposed changes in the ordinance, a new section will be inserted to list persons ineligible to be 'Resolution Applicants'. These would include wilful defaulters, undischarged insolvents, disqualified directors, persons who have indulged in preferential transactions or under-valued transactions or fraudulent transactions as determined by the adjudicating authority, and persons who are promoters or in the control of such persons whose account is classified as non-performing assets by the Reserve Bank of India for a year or more. This means the roughly 3 lakh directors who were recently disqualified following the government drive against shell firms will also be disallowed, quotes the Financial Express, unless they manage to get reprieve from the relevant authority (judicial or otherwise).
The Ordinance reportedly would also prescribe basic eligibility criteria for resolution applications, depending on the size of the business and provide a robust due diligence framework to help the Committee of Creditors assess creditworthiness, credibility and other parameters.
But many feel that not much will change even after the Ordinance comes into effect. According to sources quoted by The Economic Times, given that the criteria to define a willful defaulter or fraudulent promoter remains the same, most of the promoters remain eligible to bid for the companies. Forensic audits done on them during the earlier corporate debt restructuring and Strategic Debt Restructuring have acquitted most promoters.