The Union cabinet on Wednesday moved to prevent frivolous bankruptcy filings and shield potential bidders from the crimes of previous managements, besides liberalizing a budget initiative to boost liquidity for non-bank lenders.
Financial creditors such as homebuyers and bondholders represented by an authorized representative will now have to meet an additional threshold—which is yet to be specified—to take a company to bankruptcy courts. The large number of such creditors and the existing low threshold of ₹1 lakh exposure had made many corporate debtors vulnerable to bankruptcy cases even for the slightest delays.
A statement issued after the cabinet meeting said the idea was to prevent frivolous triggering of the corporate insolvency resolution process. A bill to amend the Insolvency and Bankruptcy Code (IBC) may specify the additional threshold or enable the government to notify it subsequently.
The change is expected to deter creditors, who have aggressively used IBC as a loan recovery tool.
The second major change is to ring-fence a company undergoing bankruptcy proceedings so that a successful bidder bringing in the much-needed investment to turn it around is protected from criminal proceedings against offences committed by the previous management and promoters. Mint reported on 2 December that IBC will soon be the final word on matters relating to the rescue of sinking companies, despite investigating agencies probing fraud by their owners and executives claiming company assets.
The amendments will make IBC prevail over other laws including the Prevention of Money Laundering Act.
The move will help in the rescue of bankrupt Bhushan Power and Steel Ltd (BPSL) by the second-largest private steelmaker in the country, JSW Steel Ltd, a transaction which has got complicated due to a probe by the Enforcement Directorate and the attachment of BSPL’s assets.
According to Cyril Shroff, managing partner at Cyril Amarchand Mangaldas, the proposed changes, especially those related to ring-fencing, should help restore investor and banker confidence in the IBC process.
“The government has rightly enhanced the focus on ensuring sustenance and recovery of businesses from bankruptcy, which is essential to sustain the economy and drive growth," said Shroff.
The government also cleared tweaking the partial credit guarantee scheme in what may improve liquidity for non-banking financial companies (NBFCs) and housing finance companies.
The revised scheme will make NBFCs that show signs of stress and have slipped into a class called special mention account in the one year leading up to August 2018 eligible for the credit guarantee scheme. The scheme, announced in the July budget, seeks to enable cash-strapped shadow banks to raise money from banks for on-lending to the priority sector, which includes small and medium businesses and the farm sector. The scheme is also now made valid for asset pools rated “BBB+" or higher as compared to the earlier condition of “AA" rated assets.
According to the latest announcement, NBFCs with lower rating or “investment rating" but with good quality loans will be included in the partial credit guarantee scheme.