Debt resolution for smaller companies may see higher challenges and number of companies going for liquidation may rise once the proposed changes to the Insolvency and Bankruptcy Code (IBC) become a law, resolution professionals dealing with smaller companies said.
The proposed law may prevent wilful defaulter from buying out their their own units post bankruptcy proceedings. This may lead to more liquidation as external investors in general are not very keen to bid for smaller firms which typically lack corporate governance and internal controls.
“The ordinance will strengthen the new law especially for larger companies under insolvency proceedings, but it will be difficult to find investors or alternative management for smaller companies,” said Anil Goel, founder of AAA Insolvency Professionals.
For example, Rasoya Proteins Ltd, the company that has defaulted about Rs 500 crore loans or Loha Ispaat Ltd with Rs 2,000 crore unpaid loans are believed to have found few external buyers despite repeated attempts, sources said. MBL Infrastructure has given advertisement for three times spending about Rs 15 lakh without evoking interest from investors except the promoter.
Individual companies could not be contacted immediately.
“The cases which are already under debt resolution process may not see the light of the day unless they get an extended deadline. There are several daddy-nanny firms which do not follow corporate governance norms or internal financial controls, and therefore external investors may not be very keen to turn around such companies,” said Mamta Binani, past president of Institute of Company Secretaries of India.
Accounting deviations are said to be higher in most promoter-driven or family-run small companies, and this could well be a prelude for external bidders to turn their back.
This is also bad news for banks as they have to make 100% provision on accounts going for liquidation putting further pressure on their already stressed earnings.
“There is market interest for large case with debt size running in thousands of crores at 60-70% haircuts, but for small cases there are not many suitors other than the promoters as distress M&A market is yet to evolve,” said Vikram Bajaj, an insolvency professional, who was involved in successful debt resolution of Chhaparia Industries.
It is expected that banks too are not comfortable with large hair-cut or loan losses with promoters, who actually have messed up with lenders’ money.
But all may take a positive turn for new stressed accounts coming for debt resolution. “Insolvency and Bankruptcy Board of India has brought out a welcome amendment because of which each case, big or small, is being subjected to forensic audit/ investigative audit. This will help investors to be aware of all the skeletons hiding in the closets and take informed decision,” said Binani, who is an insolvency professional.