Insolvency ordinance: Good politics, bad economics, once again?

 Prosenjit Datta   New Delhi     Last Updated: November 29, 2017  | 21:03 IST
Insolvency ordinance: Good politics, bad economics, once again?

The ordinance to amend the Insolvency and Bankruptcy Code (IBC), and make it impossible for existing promoters or their associates to bid for their companies may make for good politics but it probably makes less sense economically.

Politically, it makes sense to try and make sure that people who take huge loans, get the banks into trouble by defaulting, and mismanage do not get too many chances to hold on to their companies and assets at the cost of their lenders taking a steep haircut. After all, most of these promoters have already been through the corporate debt restructuring (CDR) process, and have had chances earlier of trying and settling their loans.

Banks have been unusually accommodative, giving them many chances. In the case of CDRs, the banks have taken a haircut once. There have been other options offered - the 5:25 scheme, the SDR and the S4A options, which also allowed promoters to work with banks to resolve the problems. The issue is that none worked for the 12 biggest cases, which forced the RBI to nudge the banks to take the borrowers to NCLT, under the IBC.

Having said that, the economic rationale for allowing promoters to bid is that for one, it would allow an extra bidder and therefore might spur other potential buyers to offer better bids. Two, quite a few of the promoters had signaled that they were desperate to hold on to their companies and had tied up with other financiers to bid and were expected to bid aggressively. Since they had better information about their companies than other potential bidders (given the short time the latter had to evaluate the assets under resolution), they might actually have come up with better bids.

Equally, the ordinance also brings to question the whole concept of limited liability. If a promoter is not a willful defaulter but gets into trouble because of external conditions or policy changes (for example, a mine getting cancelled, or any other changes from when the project was conceptualized), there is no real rationale to keep the promoter from bidding for the company.

Having brought in the ordinance more than halfway through the initial resolution period for the top 11 cases, it seems unlikely that any of the cases will be resolved in the 180 day period mandated under the IBC. There is an additional 90 day period that is allowed if the cases don't find resolution in the original 180 days. But now, a number of observers are apprehensive that even the 90 additional days may not be enough.

There are reports that the government might consider tweaking the law to allow at least the current cases to go beyond the 270 days (180 + 90) if a successful resolution is not found within the original period. That would be a pity because the whole idea of the IBC was to bring a quick end to cases that had dragged on for long.

Most of the companies had been in trouble for two years or more before they were brought to the NCLT. And even after a resolution at the NCLT, there are chances of delays. For example, a bidder who loses out can appeal to the National Company Law Tribunal Appellate Authority (NCLAT). Even after the NCLAT, there is the option of appealing to the Supreme Court.

Given the size of the companies involved and the potential bidders, we can expect the process to drag on for very long. The first lot of big cases will complete their 180 day period sometime in middle of January. It will be clearer then whether a resolution is close or still far away.

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