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The Insolvency and Bankruptcy Code ordinance barring the promoters of defaulting firms will increase the probability of successful resolution, said Insolvency and Bankruptcy Board of India chairman M.S. Sahoo.

The amendments to the insolvency rules will keep firms that are already stressed from bidding as they may not have the capacity to turn around another stressed firm, Sahoo said in an interview over the phone.

“You must have a way for ensuring that the people who takeover such a stressed company should not make the company further distressed. It is better to take care beforehand. Otherwise, all you are doing is postponing the day of the judgement," he said.

He added that it was reasonable to allow defaulting promoters to bid only after they have cleared their dues.

The ordinance passed on Thursday not only bars wilful defaulters from submitting a resolution plan but also keeps out several other categories of would-be bidders such as guarantors to the debtor, those with loans classified as non-performing assets for at least a year, those convicted of any offence with a prison term of more than two years, directors in companies that are disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.

It effectively rules out the promoters of the 12 firms shortlisted by the Reserve Bank of India for early bankruptcy proceedings from participating in the auction of these assets.

Some experts have expressed concern that the new law will reduce competition and depress the value of assets on sale. Sahoo said that there could be some drop in valuation but that should not be a deterrent in formulating fair and rational regulations.

“Yes, some bidders may be out. But why should we bother about that? In a country of India’s size, where there is so much interest from outside India, in India; demand for any of these companies is not limited only to Indian businessmen," he said.

Drawing parallels with the Securities and Exchange Board of India, Sahoo said, “The markets regulator does not consider impact on stock prices before barring persons from accessing or trading in the market. There is no reason for us to feel helpless if undeserving person(s) are prevented (from submitting resolution plans)," he said.

The chairman of the insolvency board further said that turning around stressed firms is the topmost objective of the Insolvency and Bankruptcy Code as it involves several stakeholders and therefore concerns of creditors become secondary.

“In any case our objective is that the company should continue to exist and that is top priority. The interests of other stakeholders like creditors and others come next. Price discovery and recovery affect only one set of stakeholders," Sahoo said.

Resolution experts, however, feel that the amendment is “unjust" to genuine promoters.

“While it is correct to say that valuations should not drive the regulations, there is no reason why the promoter of a company that has been struggling due to factors beyond his control should be penalized. If they do not have funds to revive the firm, they should be allowed to partner with someone else," said Abizer Diwanji, partner and national leader (financial services) at EY. He added that the qualitative decision regarding the robustness of the resolution plan should be left to the creditors.

Sahoo also said that the amendment makes the resolution proceedings more fair and transparent.

“If the promoter does not meet the eligibility criteria, it is fine. When you have the choice between a credible guy with good antecedents coming and another person with not so good antecedents, how do you justify that you choose the second person and not the first person?" said Sahoo.

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