Promoters of Insolvent Assets Kept Out of Bidding Process

Promoters of large stressed accounts, may no longer be allowed to bid for their own assets.

Promoters of large stressed accounts, many of which are being resolved under the IBC, may no longer be allowed to bid for their own assets.

(Photo: iStock)

Promoters of large stressed accounts, many of which are being resolved under the Insolvency and Bankruptcy Code (IBC), may no longer be allowed to bid for their own assets.

Amendments to the Insolvency and Bankruptcy Code, 2016, cleared by the President of India, say that those whose accounts have been non-performing for a year will not be allowed to participate in the resolution plan. Those who have not have settled overdue amounts on the said accounts will also not be permitted, said another provision within the amendments.

According to Section 29A, which has been added to the code, says that the following categories of entities will be disallowed:

• Willful defaulters
• Those who have their accounts classified as non-performing assets for one year or more and are unable to settle their overdue amounts include interest thereon and charges relating to the account before submission of the resolution plan.
• Those who have executed an enforceable guarantee in favour of a creditor, in respect of a corporate debtor undergoing a corporate insolvency resolution process or liquidation process under the Code
• Connected persons to the above, such as those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons

"The consequence of the second element of Section 29 regarding eligibility is that if they were NPAs for one year or more, and unable to settle the overdue amount, what can happen before the corporate insolvency resolution process commences is that they scale it down and they pay,” explained Shardul Shroff, corporate lawyer and executive chairman of Shardul Amarchand Mangaldas.

If they [promoters] bring in some third party white knight effectively at a stage prior to the corporate insolvency resolution process and have a settled value, they can have a valuation paid up to clean up all default. And assuming satisfaction of overdue amount and interest, scaled down, there is no issue.

Shardul Shroff, Corporate Lawyer & Executive Chairman, Shardul Amarchand Mangaldas

In June, the RBI had identified 12 large accounts, which made up 25 percent of the banking system’s gross non performing assets, and asked banks to refer these for resolution under the IBC. It then came out with a second list with another 30-40 companies. The RBI has given banks until Dec. to try and come up with a resolution plan, failing which these firms, too, must be taken to bankruptcy court.

The newly introduced provisions indicate that promoters of at least the first list of 12 large cases referred to the IBC under direction by the RBI would not be allowed to bid. Among these are cases like Essar Steel Ltd., where current promoters are seeking to get back control of their firms. On 23 October, BloombergQuint reported that the Ruia family is among six potential parties interested in Essar Steel.

12 large insolvency cases: Where they standPhoto: BloombergQuint

The amendments send a strong message to defaulting promoters, R Gandhi, former deputy governor of the Reserve Bank of India told BloombergQuint. “Within the short period if they do not cooperate and get the revival plan approved, they may not be able to bid for the same assets if it comes under IBC,” he explained.

The amendment, however, may have some impact on the prospects of recovery from large stressed assets. While assets in the steel sector have seen healthy interest, those in other sectors such as power may not draw investor interest easily.

“If the promotor is out of the race, the genuine bidders will tend to bid at lower levels and that will affect the bank’s recovery,” said Abizer Diwanji, consultant at EY. He added that in the past promoters have been successful at reviving stressed assets.

In India the biggest revivals we have seen are promoter-backed who had defaulted. But once their balance sheets were truly corrected, they turned around. We all thought IBC was a way to truly correct these balance sheets but this is not a fair way to look at things.

Abizer Diwanji, Consultant, EY

Here is the full press statement of the finance ministry on the ordinance

(This article was first published on Bloomberg Quint and has been republished with their permission.)