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Wednesday, 04 April 2018 04:55
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Shobhana edit

But making homeowners financial creditors not a solution

 

Going by the decision of the appellate tribunal to allow the Committee of Creditors (CoC) for Binani Cement to consider an offer by Ultratech, even though it came after Dalmia Bharat had been declared the highest bidder for the cement maker, the insolvency process, it would appear, is coming along nicely. As this newspaper has argued, adjustments to the legislation would not be out of place, especially if it means banks, and other creditors need to take smaller haircuts. Several changes to the Insolvency and Bankruptcy Code (IBC)—some of them pretty significant—are in the works. A committee looking into this has proposed changes to Section 29A of the IBC, which deals with the ineligibility of buyers to make sure bona fide entities are not disqualified from bidding for a business simply because the rules are too tight. It is a good idea to widen the pool of buyers by not disqualifying all related parties and connected persons. Also, ARCs, alternative investment funds, venture capital funds associated with companies that are bankrupt also need to be made eligible.

An ordinance was issued in November to make sure wilful defaulters weren’t able to regain control of their businesses after banks had taken big hits, and promoters and management of the defaulting company were barred from bidding. These defaulters can, however, bid if they regularise the accounts by paying back their dues. The Essar Steel episode, in which the bids of both Arcelor Mittal and Numetal were discarded after round one, shows the law is being treated with respect. The National Company Law Tribunal (NCLT) must ensure Arcelor Mittal clears the dues of Uttam Galva in which it was a promoter-shareholder. Similarly, Numetal cannot have any ties with the Ruia family, which owned Essar Steel. Else, the process would be reduced to a farce. The reason the rules should be refined is to ensure bankers don’t need to take big haircuts. In a move that will speed up decision-making, the government plans to lower the share of lenders needed to decide whether a company should be turned around or liquidated to 66% or thereabouts from the current 77%. Also, lenders holding equity from an earlier debt recast will not be treated as a related party and can vote on the rescue plan.

This newspaper has argued against homebuyers being given the status of financial creditors, which would put them on a par with banks and allow them to take builders to the bankruptcy court, because it could prompt other creditors to ask for a similar status, upsetting the hierarchy prescribed in the IBC and also disrupting the resolution process. Homebuyers do deserve justice, but the best way out is to hand over a half-finished project to a builder who would complete it; liquidating the asset would fetch a much smaller sum.

 

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