Stick to not allowing promoters to bid in NCLT PDF Print E-mail
Friday, 15 December 2017 03:13
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Shobhana edit

The idea of letting promoters bid if they make their loans 'standard' is a bad one -- why didn’t they pay up if they could

Media reports suggest the government may remove the blanket ban on corporate guarantors of failed businesses bidding for stressed assets during the resolution process; the idea ostensibly is to make the law less rigid so as to enable greater participation in the bidding process. That is a good thought since the bidding process should be fair, but the government should take care to see that errant promoters are not handed back their companies on a platter—sans the debt. Indeed, while some bankers believe promoters should be allowed to bid for their companies because otherwise the number of bids may be too few and non-promoters would ask for larger haircuts, the government’s stand on this matter has so far been unambiguous—promoters should not be permitted to bid. That was the reason for the amendment to the IBC, via the ordinance, that bars promoters from bidding for their companies. The approach is the right one and needs to be applauded. As former chairman of State Bank of India Arundhati Bhattacharya pointed out last week, if a promoter was able to regularise his account to become eligible to bid for his company, that effectively made him a wilful defaulter. As Bhattacharya observed, if he was able to make good the payment now, why did he not do so earlier? Clearly, promoters need to be disallowed from bidding for their companies because it creates a moral hazard. Even businessmen—Sajjan Jindal, for instance—have pointed out that if one promoter gets his company back with a big reduction in the debt, thanks to banks taking a haircut, others will be encouraged to do the same.  


The reports are that the government may consider allowing promoters of smaller companies to bid for their businesses. To be sure, smaller companies might attract just one bid or even none, in which case, the bidding process might not be a fair one. However, these are early days, and any changes to the rules could be considered at a later stage. It is unfortunate that the future of so many companies will now be decided in the NCLT because there is the chance that many an asset will get sold at well below its intrinsic value. It appears bankers have been able to come up with revival solutions for just for a handful of the 28 distressed companies on RBI’s “second list’”. This may not be surprising given the companies are so highly leveraged; even if the business cycle turns soon, and sharply—which is unlikely—they will find it hard to service their loans. The fact is banks have been trying for more than two years now to resuscitate companies through various schemes such as the SDR and the S4A but have, by and large, failed. They must accept their fair share of the blame. Had they initiated the clean-up process when it was finally started in the December 2015 quarter at the instance of RBI, instead of continuing to sweep the dirt under the carpet and evergreening the accounts, they might have been able to recover a lot more. Which is why, it is important now that the companies go into the right hands—not those of the promoters—and the government must facilitate this process by not diluting what is a fair piece of legislation.


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