Careful in diluting IBC law, put some checks instead PDF Print E-mail
Saturday, 10 March 2018 00:00
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Shobhana edit

Set up a committee structure to examine specific related-party bids or those where it appears front-firms are being used

Going by media reports, the government may ease some rules of the Insolvency and Bankruptcy Code (IBC) which deal with related parties. The changes are probably being considered with a view to facilitating more transactions; there is a feeling some of the clauses may be constricting to the extent that businessmen with sound credentials and deep pockets may get disqualified from the bidding process. Indeed, there have been a couple of instances where big businessmen have bid or are looking to bid, but might not be strictly eligible because they are in some way related to the promoters of a firm that is bankrupt. Since not too many bankrupt companies have found buyers so far and the process is running out of time, it is understandable the government wants to make it easier for deals to go through. The fact is that, unless the stressed companies attract bids from sound promoters, the insolvency law will take its own course and the assets are likely to be liquidated. That would fetch lenders a lot less than they would get if the businesses moved into sound hands. However, the government should be careful while relaxing the provisions of the law. It has a point in that it would be unfair to cast aspersions on the integrity of all related parties—there could be those who are bona fide.

Barring them from the process would seem unreasonable. What the lawmakers could do, perhaps, is to add a clause that allows for related parties to participate in the bidding process in exceptional cases. However, these bids would need to be quickly vetted by a high-level committee chaired by a former Supreme Court judge. Indeed, there must be checks and balances to ensure defaulter promoters—who have not made good their loans, as the law specifies – are not bidding through front companies. Changing the rules altogether to allow related parties to participate in the bids might lead to the code being vitiated. After all, the amendments made to the IBC in late November 2017 were meant to be safeguards to prevent “unscrupulous, undesirable persons from misusing or vitiating provisions of the Code”. It is true that allowing related parties to bid in exceptional cases might seem somewhat subjective and prompt rival bidders to go to court. However, this might be a better option than diluting the Code altogether. There are checks and balances in place; Section 30(4) of the Code has been amended to make the Committee of Creditors (CoC) responsible for ensuring the resolution plan is feasible and viable before it approves the plan. The government is also believed to be considering allowing mid-sized and smaller companies—that have defaulted on their loans—to bid for stressed businesses if they are not wilful defaulters. There is a feeling smaller companies will not attract bids and, therefore, assets could be destroyed unless the promoters get back their businesses. While this does create a moral hazard, it would nonetheless help protect assets and probably help banks recover more than they might have if the company had been liquidated.


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