Published: Thu, November 23, 2017
Money | By Armando Alvarado

President okays ordinance to amend insolvency act, make it stricter

President okays ordinance to amend insolvency act, make it stricter

It has cleared the Ordinance for making amendment in the Insolvency and Bankruptcy Code (IBC), which is touted as Prime Minister Narendra Modi's biggest reform to reduce bad loans, to prevent wilful defaulters from bidding for stressed assets.

President Ram Nath Kovind on Thursday gave his assent to the Ordinance approved by the Union Cabinet to amend the Insolvency and Bankruptcy Code (IBC) to strengthen the regime. The government has been anxious about the political consequences of such an eventuality - promoters regaining control - as banks are forced to swallow loan losses.

The Code that came into effect from December a year ago, allows a market-determined and time-bound insolvency resolution process under the eyes of the Corporate Affairs Ministry.

The criticism against this loophole in the IBC further peaked earlier this month, when Rajnish Kumar, chairman of State Bank of India, claimed that promoters of companies facing insolvency and bankruptcy proceedings are within their rights to bid for their own assets.

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According to a report in the Times of India, the ordinance will indeed have the provision to bar bidding by wilful defaulters. The government opted for the ordinance route weeks before the winter session of Parliament as some defaulting cases are likely to come up for resolution soon. This also includes those who are promoters, in the management or control of such persons whose accounts are classified as nonperforming assets beyond a prescribed duration. The revised regulations ensure that applicants, including promoters, are put to a stringent test with respect to their credit worthiness and credibility, prior to the approval of a resolution plan. Wilful defaulters are those who have deliberately avoided repayment of loans despite having the capacity to do so, have diverted funds for other purposes or siphoned off money. It is implemented by the corporate affairs ministry.

The details of the resolution plan shall disclose details of identity, convictions for any offence in the preceding five years, pending criminal proceedings, disqualifications under the Companies Act, 2013, identification as a willful defaulter by any bank or financial institution in accordance with the guidelines of the Reserve Bank of India, debarment, from accessing to, or trading in, securities markets under any order or directions of the Securities and Exchange Board of India, and lastly, the transactions, with the corporate debtor in the preceding two years. This move will go a long way in preventing promoters from using shell companies to regain control of their defaulting companies.

The Insolvency and Bankruptcy Code, 2016, provides for time-bound "Insolvency Resolution" to release assets locked up in NPAs and promote maximisation of value of assets, failing which, underutilised resources of unviable business are released through liquidation.

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