The Union cabinet on Wednesday approved amendments to the Insolvency and Bankruptcy Code (IBC) to plug potential loopholes in the new corporate turnaround regime and to ensure rescued companies remain in reliable hands.

Finance minister Arun Jaitley said changes to the IBC have been proposed through an ordinance that’s awaiting presidential assent.

One of the changes proposed is to ensure that promoters deemed wilful defaulters do not eventually end up taking control of the company again. The exact nature of the amendment and its scope will be known only after the text of the ordinance is available after the president gives his assent, a person familiar with the development said on condition of anonymity.

“Some changes have been proposed in the Insolvency and Bankruptcy Code. Since this is being done by way of an ordinance, till it is approved, as a matter of propriety, we shall not give details," Jaitley told reporters.

The government put in place a new bankruptcy resolution regime and empowered the Reserve Bank of India (RBI) to nudge banks to take defaulting firms to the National Company Law Tribunal (NCLT) in a decisive attempt to deal with the Rs10 trillion of toxic assets (bad loans and restructured loans) choking the banking system. The bad loans have also impaired lenders’ ability to finance new projects to boost economic growth, which slumped to 5.7% in the quarter to June, the slowest pace in three years.

The administration has been quick in responding to implementation challenges of the new bankruptcy code, one of which is the possibility of wilful defaulters subverting the legal process to remain in control of the company by proposing revival schemes. The code, as it stood prior to the amendments approved on Wednesday, does not prevent promoters of a failed company from proposing a turnaround plan. There have been concerns that promoters could reacquire their companies at a discount once the creditors decide to sacrifice a part of the money they are owed as part of a debt resolution plan.

In recent weeks, the Insolvency and Bankruptcy Board of India made it compulsory for the revival plans to take cognizance of the credentials of those who propose revival schemes, including original promoters, and to specify how the interests of employees, vendors and customers of the failed entity will be taken care of. The regulator also clarified that if the NCLT approves a turnaround scheme, the promoter will be deemed to have consented to it.

In June, RBI referred 12 large defaulters to creditors for the start of bankruptcy proceedings at the NCLT. The 12 entities made up a quarter of gross bad loans, which reached Rs7.79 trillion at the end of June.

The proposed amendments are expected to make the insolvency resolution process more robust, said Kalpesh Mehta, a partner at Deloitte India. “The implementation of this amendment would block failed promoters from regaining control of the companies facing insolvency proceedings under the Insolvency and Bankruptcy Code," he said.

One banker red-flagged a potential challenge.

“There is a risk that a few bidders may collude with banks to declare some of the competing bidders as wilful defaulters in order to eliminate competition. In such a scenario, the amendment could lead to a fall in realization of value for the creditors," said the banker, a deputy general manager at a public sector bank who spoke on condition of anonymity.

Sumant Batra, managing partner at law firm Kesar Dass B and Associates, said that if the bankruptcy code does not define who a wilful defaulter is, a bank’s decision to declare a promoter as a wilful defaulter may be subject to a challenge in court and will complicate the resolution process.

Malvika Joshi in Mumbai contributed to this story.

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