Bankruptcy Code

The IBC gets a facelift, but will it defeat the entire process?

The President of India gave his assent to an Ordinance to make amendments to the Insolvency & Bankruptcy Code (IBC). While the bill could have been passed in the Winter Session starting on December 15th, the banking resolution is obviously a race against time. What are the reasons for this amendment and how will it make the process better? Above all, will it amount to throwing the baby with the bathwater?

Good in intent…

The principal amendment proposed in the ordinance is to prevent defaulting promoters from bidding for the assets of their own company. The move is truly justified. The government feared that the same promoters who had defaulted on the loans would bid for their own assets at a much lower rate. Effectively, the promoter gets back control of the company without really getting the stamp of a defaulter and also gets the benefit of a big haircut. There were some instances where there was an obvious an attempt by the promoters to buy back their own company at lower prices. As one government official put it, this amounts to a double whammy. On the one hand, these promoters have taken no risk in the project by overstating the cost of the project. Secondly, they will get back their own assets at a much larger haircut. That would be unfair to banks. From that perspective, this is justified on the part of the government and the banks

But, a tad too stringent

The big worry is that the actual provisions of the IBC amendment are a lot more stringent. For example, willful defaulters are straightaway barred from bidding, which is good. But even non-willful defaulters who are guilty of overstating project costs or of misallocating funds are going to be barred. The problem is that this will make the banks once again too cautious about whom to sell these assets to. Banks are quite certain that any lapse from their side will mean that the ED and the Vigilance Department will be hot on their heels. This is likely to make bankers err on the side of caution, which is not a great situation to have especially when you are attempting something of such large proportions.

Throwing the baby with them

Our only worry is that these stringent regulations will almost amount to throwing the baby with the bathwater. As it is, most of these assets are not going to be easily liquidated at short notice.  The banks will be depending on the support of these promoters and their close groups to take over these assets.  In fact, the new IBC will keep defaulters even from bidding for other business assets in the same industry. That shuts a major market for banks to find buyers. IBC is a brave experiment. It will be a shame if it gets lost in a maze of regulations! ©

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