New Delhi: The Parliament on Tuesday gave its nod to amendments to the insolvency and bankruptcy code that aims to keep defaulting promoters out of the resolution process of insolvent companies.
The Insolvency and Bankruptcy Code (IBC) (Amendment) Bill 2017 was passed by Rajya Sabha amid concerns that the changes could bar genuine domestic investors from the insolvency resolution process, adversely affect micro, small and medium enterprises (MSMEs) and lead to large scale litigation.
The bill, which replaces an ordinance, was passed by the Lok Sabha last week. The amendments will be notified after the President gives his assent.
Responding to the debate, finance minister Arun Jaitley said insolvency is a relatively new area in India and there could be further corrections in laws and rules depending on the experience of the resolution process. “I hope we do not come back to the house very frequently," he said.
Jaitley expressed hope of a successful resolution process at least for those companies that are asset-backed. The finance minister also assured that the government is committed to protecting the interests of MSMEs.
“The insolvency legal committee is already looking into the suggestions if you need a separate framework for MSMEs. It will submit its report in three months," he said.
The IBC ordinance sought to bar wilful defaulters, defaulters whose dues had been classified as non-performing assets (NPAs) for more than a year, and all related entities of these firms from participating in the resolution process.
The bill, however, allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month to make their loan account operational and the resolution happens within the overall time frame specified in the code.
This will help promoters who had submitted resolution plans before the ordinance barred them from taking part in the resolution process of companies.
The bill also allows asset reconstruction companies, alternative investment funds (AIFs) such as private equity funds and banks to participate in the bidding process.
Many of these entities acquire distressed assets and the classification of these assets as NPAs would have disqualified them from the bidding process. Similarly, banks opting to convert their debt into equity under the Reserve Bank of India’s scheme for sustainable structuring of stressed assets would have inadvertently become promoters of these insolvent companies and thereby been barred from the resolution process.
The Insolvency and Bankruptcy Code was enacted in 2016 to find a time-bound resolution for ailing and sick firms, either through closure or revival, while protecting the interests of creditors. A successful completion of the resolution process was expected to aid in reducing rising bad loans in the banking system.
The bill has also sought to bring any individual who was in control of the NPA under the ambit of the insolvency code. It lays out that the individual insolvency law will be implemented in phases. It also allows guarantors of insolvent firms to bid for other firms under the insolvency process.
Speaking in the debate, former finance minister P. Chidambaram pointed out that the changes to the law may keep out a large number of domestic investors.
“Very few people in India will be eligible to bid. ARCs, AIFs registered abroad will turn out to be the bidders. Most Indian companies going through a resolution process will see the management change hands from Indian management to foreign management...A level playing field should have been created for adequate number of Indian companies and investors to bid for these assets," he said. “We may end up with no bidders for the company as a going concern and you will end up selling the company in bits and pieces," he added pointing out that exclusions of investors should have been kept to a minimum.