In defence of its recent insolvency ordinance, the government has asserted that the entire effort is aimed at “disqualifying errant promoters” while providing for a level-playing field for all prospective resolution applicants, including the promoters.
There is no merit in the contention in certain quarters that the ordinance is “anti-promoter” and designed to keep away all promoters from participating in the resolution process, official sources said.
Such a canard — that it is “anti-promoter” — is being spread to perpetuate the interests of a few entrenched promoters to regain control over their assets, which are undergoing insolvency, they said.
Facing the heat
In fact, for the first time the borrower is facing the heat, including the risk of enforcement of his personal guarantee. Under the earlier insolvency resolution framework, where the borrower was in total control of the assets, empirical evidence suggested that the majority of them continued to mismanage and siphon off funds, they said.
On the other hand, under the new Insolvency and Bankruptcy Code (IBC) framework, the assets are kept under the management control of the resolution professional, and the committee of creditors are in overall control. Most importantly, the entire process has been made time-bound..
The government has outright rejected the argument by vested interest groups that the ordinance makes promoters as a class ineligible to participate in the insolvency resolution process, which is contrary to the legal position.
As per the ordinance, to become eligible to be a resolution applicant and submit a resolution plan, all prospective applicants, including the promoters of the corporate debtor undergoing the insolvency resolution process, and those connected with them, are required to pass the litmus test that they do not attract any of the ineligibility conditions specified in Section 29A of the Act.
Hence, it provides for a level playing field for all prospective resolution applicants, official sources said.
Further, with respect to those who have accounts that have been declared as non-performing assets and where a period of one year or more has elapsed since such classification, a window of opportunity has been given to overcome the ineligibility by paying up the overdue (including interest and other charges).
This also tests the resolve and commitment of the prospective resolution applicant with an NPA account, including the promoter, to revive the sick company.
The government also sees no merit in the contention that in the absence of the promoters, the offers would not be competitive, which runs contrary to market rationale.
Meanwhile, the government also highlighted that there are some long-standing default cases with net debt to EBITA ratio of over 60 against the acceptable norm of below 10. This shows that at the current earnings, it would take 60 years for the debt to be repaid, assuming current level of liabilities remain static, sources said.
Indian system vs others
It was also felt that it may not be right to compare the Indian system with that of the UK or the US. One must realise that in these countries, the companies are generally widely held and there is no equivalent to the typically family-controlled business in India, where there is excessive concentration of power.
Accordingly, the emphasis there is on disqualifying errant directors responsible for making the company insolvent whereas the emphasis here is on disqualifying errant promoters.