It is welcome that the government has tightened the eligibility norms for bidding for companies being resolved under the Insolvency and Bankruptcy Code (IBC), to eliminate the scam of a promoter who has siphoned money out of a company, accumulated unserviceable loans and defaulted on debt servicing buying his own company back at a discount, shorn of most of the debt.
More can and should be done, to prevent the insolvency process, meant to create an exit route for failed managements, from becoming a source of political embarrassment.
The way to ensure that the resolution process yields optimal recovery for the lender is to create a competitive market for the assets being sold. The Financial Sector Legislative Reforms Commission that paved the way for IBC had also recommended creation of information utilities that would assemble all the detailed data on the companies being resolved, for potential bidders to assess.
Absence of comprehensive data would deter some bidders. These information utilities can still be set up. More private equity firms and so-called vulture funds must be encouraged to take part in the bidding. Stressed assets in several sectors, such as steel and power, for example, would be on offer at relatively cheap prices. If only a few steel/power companies take part in the bidding, the winner would walk away with prize assets at a fraction of the cost of setting up equivalent new capacity. To prevent such bonanzas for successful bidders at the expense of the taxpayer, who must fund the banks’ haircut on these assets, it is possible for the government to nudge, say, SAIL/NTPC to set up special purpose vehicles in partnership with banks, LIC or new special situation funds in the National Pension System or the Employees’ Provident Fund, to bid for the assets on sale.
The more the bidders for resolution assets, the better the resultant recovery for banks, and the lower the taxpayer spend on cleaning up the banking mess. The higher the resolution proceeds, the smaller the scope for allegations of impropriety.