In a landmark move, the President of India gave his assent to the Bankruptcy Ordinance, which has virtually closed the door on errant promoters wanting to regain control over their defaulting companies. While the signalling is strong and welcome and would force promoters of stressed companies to hasten the resolution process, the move has unintended consequences as well. For bidders with requisite financial muscle, it might be a once-in-a-lifetime opportunity. Here’s a look at who could gain from this exercise.
The Ordinance
But first, a look at the Ordinance. Its broad objective is to prevent unscrupulous, undesirable persons from participating in the resolution process - in lay man’s terms to prevent back door entry of promoters who have defaulted. It also puts the onus on the Committee of Creditors (who are mostly going to be bankers) to ensure the viability and feasibility of the resolution plan before approving it.
In a nutshell, the following categories would be out of the bidding process for stressed assets:
1.Wilful defaulters
2.Undischarged insolvents
3.Promoters or sister concerns of companies with non-performing assets of more than one year
4.Persons convicted of an offence with over two-year imprisonment
5.Individuals disqualified as directors under Companies Act
6.Person banned by SEBI from Securities market
7.Persons banned under IBC for fraudulent activities
8.Person who executed enforceable guarantee in favour of a creditor in respect of insolvent entity
The Good
The tweak in the Ordinance at a first glance looks like a great move on the transparency front as domestic and global investors have time and again expressed concerns over meddling promoters in the resolution process.
In the long-run, it will force promoters whose companies are about to default to press for an early resolution to prevent the company from being taken to insolvency by the banker. Promoters are likely to pull out all stops early in the restructuring exercise and unlikely to put the onus solely on the bankers, as the evergreening exercise by banks seldom prevents an ultimate default.
The promoter might themselves take the initiative to refer the company to the NCLT in order to meet the one-year deadline to avoid being barred from bidding for their assets. An early restructuring is in the interest of the system: usually by the time a company goes into insolvency it loses most of its value. An early resolution will minimise the loss, as the haircut on an asset which is still not defunct is likely to be a lot less.