Plugging loopholes in the insolvency process PDF Print E-mail
Thursday, 09 November 2017 06:08
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If defaulters allowed to bid for their own companies, it will lower the integrity of the insolvency process


Over the years, not only has India Inc defaulted on its loans to banks in a big way, there has been a strong suspicion a lot of the money has been diverted by unscrupulous promoters; in several cases where forensic audits have been ordered, this has been borne out. While banks have given defaulting promoters many opportunities to restructure loans, most have preferred to arm-twist banks into rolling over loans to avoid the stigma of NPAs and, more importantly, the need to provision for them. All of this changed when, under Raghuram RajanRBI forced banks to be more honest in recognition of their dodgy loans and even gave banks the spine to deal with dishonest promoters.

The process got a big leg up when, after the Insolvency and Bankruptcy Code was legislated, RBI started telling banks about which loans they needed to refer to the National Company Law Tribunal for bankruptcy proceedings.  Given the huge build up of bad loans—between just March 2015 and June 2017, NPAs have risen by `4.6 lakh crore due to RBI forcing banks to come clean—and how this has crippled both banks and companies, the only way out is for both to take big haircuts, on debt and equity of a project/company to make it viable. It is obvious, given the large number of companies that are in trouble, that the original promoters may get back control in a large number of companies after the haircut—this is what happened in the case of Synergy Dooray and that resolution is now being appealed in the National Company Law Appellate Tribunal.

But it is important to ensure this does not happen in the case of the really big defaulters, more so if they were found to be guilty of siphoning off of funds as well. It is in this context that the government decision to amend the insolvency regulations to ensure that the “antecedents, credit worthiness and credibility of a Resolution Applicant, including promoters, are taken into account by the Committee of Creditors” is a good one. The details that will have to be made public will include whether a bidder/promoter is a willful defaulter, has ever been faced serious action by Sebi, etc—this, in fact, was the point made by SBI chief Rajnish Kumar a few days ago when he said both wilful defaulters as well as those found guilty of siphoning off funds—through a forensic audit—will not be allowed to bid even though they were within their legal rights to be able to bid.

The only catch here is that since, in the past, banks were quite willing to evergreen loans, few of the big firms that owe banks tens of thousands of crore rupees were ever labelled wilful defaulters or even found guilty of siphoning off of funds, except in very few cases—while NPAs are around `8 lakh crore right now, the amount owed by wilful defaulters is just an eighth of that. In which case, they would escape the new filter and would be able to bid for their companies. Insolvency resolution professionals and bankers—who make up the creditors’ committee that calls the shots in any resolution—will have to ensure they make the most of the new protection the law offers and, if need be, point to other amendments needed to ensure promoters of big NPA firms don’t get back control of their firms unless there was a genuine business-cycle or other reason for the default.


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