Economy

KEY POINTS

Need for an amendment

·         In the current form of IBC, there are no restrictions on who has to be a “Resolution applicant”.

·         This gives an opportunity for the existing sponsors/promoters of corporate debtors (i.e. the company with debt and under the insolvency proceedings) to take part in the auctioning process.

·         This actually merits the debtor to avail a resolution plan that entails substantial discount to outstanding loans of lenders.

·         A promoter hoping to win back control at a steeper discount once his firm undergoes the bankruptcy process is less likely to cooperate with bankers in the lender’s forum for recovery using other debt restructuring mechanisms. 

·         This actually erodes the real intent of IBC: to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders.

Amendment to address shortcomings

·         An amendment in the IBC makes certain persons ineligible to be a ‘resolution applicant.’

·         Barred persons include: Wilful defaulters, NPA defaulter for 1year or more, those who execute an enforceable guarantee in respect of a corporate debtor.

·         The Amendment Ordinance aims at putting in place safeguards to prevent unscrupulous, undesirable persons from regaining control of the defaulting company through the backdoor in the garb of a ‘resolution applicant.’

Does it supplement IBC?

·         Though it seems helping in strengthen the formal economy and encourage honest businesses and budding entrepreneurs to work in a trustworthy, predictable regulatory environment, but it could in all likelihood lead to fewer bids and of lower value as it eliminates a potential bidder by default.

·         Lower bids means banks will have to sacrifice more of the money they are owed and take larger losses, and the burden gets shifted ultimately to the taxpayer.

·         It will affect the low demand sector too much.

·         E.g. Thermal power assets are unlikely to get the same buying interest as steel gets.

·         Apart from the big cases, there are dozens more mid-tier firms which are entering the resolution process and are unlikely to find as many bidders.

·         Keeping out promoters may protect the government from accusations of crony capitalism but it is a body blow to banks seeking to extract the most paise out of every rupee of loans in default.

Please review.. Thanks