Under pressure from the catalogue of voluble surround sound, government seems to have succumbed to slapping a blanket ban on promoters to bid for stressed assets under the Insolvency and Bankruptcy Code (IBC). By bringing an ordinance to bear on this issue, the die appears to have been cast, the oxygen cut of for alleged willful defaulters.
The Modi government will have to weigh the pros and cons of such a move given that several companies may have got into insolvency proceedings owing to genuine business failures that are cyclical and market determined.
Unless the promoters are proclaimed willful defaulters, banning them from bidding for sticky assets could lead to a piquant situation. Already the Insolvency and Bankruptcy Board of India (IBBI) has drawn up guidelines on the issue. It has laid out norms to check the background, credit worthiness, credibility and track record of promoters before allowing them to enter the bidding fray.
These norms should serve as guidance for finance and corporate affairs minister Arun Jaitley to draw up amendments to the IBC. While a Presidential Ordinance was expected to hasten up the process of insolvency cases, the bill to be piloted by Jaitley in the winter session should make worthwhile changes to clean up stressed assets and balance sheets of banks having exposure to such assets.
Rightly, Union Cabinet took up the proposal to amend the IBC and ban willful defaulters from bidding for stressed assets at deep discount. A clear distinction between willful defaults and genuine business failures will have to be made. Unless a consensus on the issue was evolved through Parliament, insolvency professionals appointed to resolve the process are bound to soft pedal the process.
Given the Essar Steel case, the government will have to take a stand on allowing group companies or the holding company with same promoters at its command, to bid for the stressed assets especially in the case of listed entities.
National Company Law Tribunal (NCLT) has already admitted over 300 cases for proceedings under insolvency and bankruptcy law enacted after inordinate delay and policy paralysis symptomatic of the erstwhile UPA regime headed by then prime minister Manmohan Singh. First set of 11 cases alone account for 25 per cent of soured loans with banks besieged by a total stressed exposure of $ 170 billion. Steel is at the vanguard with as many five representatives from the embattled sector.
Overlapping of norms dished out by IBBI and markets watchdog Sebi especially on listed entities will best be avoided. The 14-member expert panel set up by the government will have to ensure there are no regulatory overlaps.
While the 180-day window was seen as sacrosanct to either provide a resolution plan, liquidation should be the last option within the NCLT framework or outside. Nothing should prevent promoters of stressed businesses and banks from engaging to thrash out a resolution package without waiting for the tedious and expensive legal proceedings, insolvency professionals that cost a bomb.
While haircuts seem inevitable in genuine cases, banks officials continue to fear reprimand, naming and shaming by powers that be. Most bank officials seem to be disinclined to bell the cat even in genuine business failures. More so, if asset reconstruction companies are coming forward in conjunction with beleaguered promoters to revitalise the company by offering to pay a large part of the loans, then it makes eminent business sense to resolve the case. Resolution instead of liquidation has to be the mantra and this can only happen with both sides amicably agreeing to a hair cut.
Indian Banks Association (IBA) has taken the position that liquidation value of stressed assets cannot become public information before hand. This could lead to allegations of huge fraudulence. Keeping the resolution or liquidation process simple, transparent and above board will lend credence to the massive exercise initiated by the Modi government.
Exempting the resolution cases or businesses under liquidation from levy of minimum alternate tax (MAT) is yet another issue that the IBBI, Sebi and finance ministry must look into. Many of these imponderables need to be examined carefully for they are impeding the process.
Unless the insolvency and bankruptcy cases are handled with sensitivity, the present exercise could land corporate India and banks into a bigger mess, given the extent of the twin balance sheet malaise. This could unnerve the small investors and foreign portfolio institutions who have been flocking to Indian markets in search of value deals.