New Delhi: The Lok Sabha on Friday passed the Insolvency and Bankruptcy Code (Amendment) Bill 2017, paving the way for tightening loopholes in the existing code and making the resolution process more effective.

The bill replaces an ordinance that was brought in last month seeking 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 has diluted some of the stringent provisions of the ordinance and seeks to strike a balance in the trade-off between punishing wilful defaulters and ensuring a more effective insolvency process.

The bill allows defaulting promoters to be part of the debt resolution process, provided they repay the 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 amendments aim to correct these anomalies.

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.

Responding to the debate on the code, finance minister Arun Jaitley said the experience with the resolution process so far had triggered the need for introducing an ineligibility criteria to ensure that defaulting promoters are not able to regain control of their companies after the resolution process, leaving only the creditors poorer.

“There are countries in the world that allow defaulting creditors to bid. But we have a situation in India where we have to take a decision (to keep these promoters out)," he said.

Jaitley also defended the need to promulgate an ordinance, pointing out that there was an urgency to ensure that all insolvency cases are treated in the same manner.

Countering allegations from the Congress that the government had not taken adequate steps to bring down non-performing loans in the banking system, Jaitley said all the loans involved under Insolvency and Bankruptcy Code are those which were given before 2014.

“The high levels of NPA at present are due to window dressing and due to evergreening of loans. This situation has arisen because loans were restructured and not classified as NPAs. The problems were shoved under the carpet and these came to light because of the asset quality review initiated by RBI in 2015," Jaitley said.

As of end-September, NPAs in the Indian banking system made for around 9.85% of total advances, according to Care Ratings.

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