Delhi

Insolvency ordinance levels field, not anti-promoter: Govt

 

Defending the new measures that prevent errant promoters from trying to reacquire assets till they clear dues, government officials claim the the insolvency ordinance provides a level playing field to all parties interested in participating in the resolution process and ensuring there are enough players for the bids to be competitive for stressed assets.

“Some are labelling it (ordinance) as anti-promoter to perpetuate the interests of a few entrenched promoters to regain control over their assets,” said an official, holding “habituated, spoiled businessmen” used to getting policies changed and living off public money responsible for this criticism.

Officials said the amended law does not completely prevent promoters from bidding for stressed assets. It provides a window of opportunity, as promoters can repay the loan and dues and become eligible for bidding. This also bears testimony to the resolve and commitment of the prospective resolution applicant with an NPA account, including the promoter, to revive the sick company.

The government had last week issued an ordinance to amend the Insolvency and Bankruptcy Code, prescribing a number of eligibility conditions for resolution applicants looking to bid for assets or companies undergoing resolution.

The insolvency law, passed in May last year, consolidated all laws relating to bankruptcy and provided a comprehensive framework for resolution of failed businesses.

India is at 103 in the World Bank’s ease of doing business ranking on the parameter of resolving insolvency. Post the ordinance, any promoter with a non-performing loan for over a year is not eligible to be a resolution participant. This effectively keeps out promoters of insolvent companies undergoing resolution.

The provision has been criticised by some on the ground that banks will not get a good value for assets if promoters are kept out. Some of the promoters of companies undergoing resolution might challenge the new provision in court. Official sources said it was possible that a promoter may be willing to pay more than the true economic value of an asset in order to regain control without any intention of repaying dues.

Chances are that they were unlikely to have reformed their ways and the higher bid would need to be discounted by this higher risk of doubtful future realisation. Senior officials further said it was being argued that genuine business failure might have resulted in loan defaults. But they pointed out that in many longstanding default cases, net debt to EBITA(earnings before interest, tax and amortisation — from which interest costs are paid) was in excess of 60 against the acceptable norm of 10. Even if liabilities remain static, it would take 60 years to repay the debt.

“Such state of affairs cannot have occurred without continuous mismanagement and malfeasance,” said an official. The official added that the updated law raises the heat on the borrower for the first time, including the risk of enforcement of personal guarantee. Under the earlier law, the borrower remained in control of assets, while now management control was with the resolution professional under the oversight of the committee of creditors.

Written by The Realty Paper


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