NEW DELHI /MUMBAI: A day after the Cabinet cleared the Ordinance seeking to bar wilful defaulters and promoters with NPA accounts from bidding for assets under insolvency proceedings, President Ram Nath Kovind on Thursday gave his assent. The development comes as a blow to defaulting promoters planning to reclaim firms by bidding for them through auctions.
The Ordinance amends six sections besides inserting two new sections in the Bankruptcy Code.
According to the Ministry of Corporate Affairs, the changes are aimed at putting in place safeguards to “keep out such persons who have wilfully defaulted, are associated with non-performing assets, or are habitually non-compliant and, therefore, are likely to be a risk to successful resolution of insolvency of a company”.
The move comes in the wake of rising concerns that a defaulting promoter could wrest control of firms under insolvency proceedings even as banks take a hit on the loans.
The Ordinance stipulates that those who have their accounts classified as NPAs for one year or more and are unable to settle overdue amounts including interest and charges before submission of the resolution plan will be ineligible to participate in auction of company assets.
Corporates, promoters, holding companies, subsidiaries, and associate companies or related parties undergoing insolvency resolution or liquidation under the IBC will also not be eligible for bidding for the stressed assets.
New rules also require the Committee of Creditors (CoC) to ensure viability and feasibility of resolution plans before approving them.
Notably, the CoC is now required to “reject a resolution plan, which is submitted before the commencement of the Ordinance but is yet to be approved”. The Insolvency and Bankruptcy Board of India -- the enforcing agency -- has also been granted powers to impose a penalty of up to Rs 2 crore on violators.
Lenders and analysts welcomed the move, noting that existing sponsors covered by these amendments directly or indirectly cannot retain control at the cost of lenders by “seeking huge hair cuts and being back in business”.
Rajnish Kumar, chairman, SBI, dismissed concerns that the Ordinance would reduce valuations. “There’s lot of interest in these assets. Valuation has nothing to do whether the existing promoters are allowed to bid or not,” he said, adding that interest from bidders will be driven by the outlook and quality of the asset.