Skip to main content

Cabinet clears changes to plug loopholes in insolvency code

Cabinet clears changes to plug loopholes in insolvency code
Govt to amend insolvency and bankruptcy rules via ordinance, will block promoters deemed wilful defaulters from regaining control of firmsThe Union cabinet on Wednesday approved amendments to the Insolvency and Bankruptcy Code (IBC) to plug potential loopholes in the new corporate turn around 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 recognizance 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.
The Economic Times, New Delhi, 23th November 

Comments

Popular posts from this blog

Shrinking footprints of foreign banks in India

Shrinking footprints of foreign banks in India Foreign banks are increasingly shrinking their presence in India and are also becoming more conservative than private and public sector counterparts. While many of them have sold some of their businesses in India as part of their global strategy, some are trying to keep their core expertise intact. Others are branching out to newer areas to continue business momentum.For example, HSBC and Barclays Bank in India have got out of the retail business, whereas corporate-focused Standard Chartered Bank is now trying to increase its focus on retail “Building a retail franchise is a huge exercise and takes a long time. You cannot afford to lose it,” said Shashank Joshi, Bank of Tokyo-Mitsubishi UFJ’s India head.According to the Reserve Bank of India (RBI) data, foreign banks’ combined loan book shrunk nearly 10 per cent from Rs 3.78 trillion in fiscal 2015-16 to Rs 3.42 trillion last financial year. The banking industry, which includes foreign banks…

GST Refund of Rs 20,000 Cr Pending: Exporters’ Body

GST Refund of Rs  20,000 Cr Pending: Exporters’ Body Refund of over Rs 20,000 crore on account of Goods and Services Tax (GST) is pending with the government with more than half the amount stuck as input tax credit, Federation of Indian Export Organisations said on Tuesday. While claims over Rs7,000 crore were cleared in March, the amount was Rs 1,000 crore in April.However, after exporters’ request, the GST council and tax department are organizing a second phase of Special Refund Fortnight starting May 31, which will enable exporters to draw their refunds at a speedy pace. Many exporters have been unable to file the refund of input tax credit due to technical glitches, exports and claim happened in different months. The major challenge lies on ITC refund especially because the process is partly electronic and partly manual which is cumbersome and add to the transaction cost, the exporters’ body said. On IGST, refunds are getting delayed due to airline and shipping companies not submitt…

RBI rushes in to prop up falling rupee

RBI rushes in to prop up falling rupee India’s central bank reportedly intervened in the currency markets on Monday to prevent a further slide in the local unit, which breached the 67 mark to a dollar for the first time in 15 months amid a widening trade gap and runaway import bills fuelled by high crude-oil prices. Some state-owned banks were seen selling dollars aggressively, interventions that market dealers attributed to the central bank’s strategy to stem the decline of the Indian rupee against the US currency. The rupee is the worst performing among a dozen Asian monetary units in the past three months. It lost 4.25 per cent to the dollar during the period, show data from Bloomberg. On Monday, the Reserve Bank of India (RBI) is said to have sold about Rs 800 million collectively on the spot and exchange traded futures markets, dealers said. An email sent to RBI remained unanswered until the publication of this report. The currency market has seen such a strong central bank interven…