Solution to stressed assets lies in creating market for resolution: IBBI Chief

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The solution to the buying of stressed assets does not lie in allowing tainted persons to come in but a solution lies in creating a market to arrive at a resolution, according to MS Sahoo, Chairman of Insolvency and Bankruptcy Board of India.

His comments come at a time when the government committee has sought public comments on provisions to debar existing promoters from bidding for distressed assets undergoing insolvency proceedings at various NCLTs (National Company Law Tribunals).

Many lawyers, promoters, bankers and industry professionals have said that the amendment to the bankruptcy code initiated through an ordinance in November will not only depress valuations but also shut out clean promoters who may have defaulted on loans due to adverse market conditions and business cycles.

According to Sahoo, “It (the amendment) does not debate on promoters v/s non promoter. There is a debate that it will depress valuation, to which I do not agree. We are looking at a scenario where we get more bidders who are not tainted. So, the solution is not to allow tainted persons but create a market to arrive at a resolution.”

The government panel has sought comments from stakeholders at a time of considerable unease on account of the recent amendment to the IBC which prohibits defaulting promoters and related entities from bidding for their assets.

Headed by the Ministry of Corporate Affairs Secretary Injeti Srinivas, the committee held its first meeting on December 8.

“Comments/suggestions along with brief justification may be sent through the online facility available on MCA website up to January 10, 2018. It is requested that comments/suggestions be provided through this online facility only,” a government press release said.

“SMEs (small and medium enterprises) will not get anyone else to come, there could be some genuine business reasons for the company to reach this stage; these things should be differentiated [sic]…Large number of assets may not get 100 percent value… Buyers’ market will take time to evolve and hence existing stronger companies should get more access to the market,” said Ajay Piramal, Chairman of Piramal Enterprises at a panel discussion organised by the National Stock Exchange and NYU Stern on Thursday.

However, Sahoo doesn’t subscribe to that view. At the same panel he said, “I think it will, in fact, have more interested buyers…There is a moral hazard if the same promoter who has siphoned off funds is allowed to come back. He will default and then buy it at a 50 percent discount under NCLT. I don’t think that kind of a rule can be permitted.”

According to him, we need to create a market to make it easy for IRPs (insolvency resolution professionals) to raise interim financing and hence create value. “We are interested in a more liquid market with more participants… Creating a market is a long-term solution.”

The government has also sought feedback from stakeholders to identify issues impeding the efficiency of the IBC resolution and liquidation framework.

Some industry experts say the definitions of wilful defaulter and related party in the context of the bidding process under the IBC need to be well-defined.

“The ordinance is very wide; it seems to debar many people in India. Related party is very vague and everyone could be a related party. Wilful defaulter has not been properly defined and needs to be relooked at. We also need to re-think whether these debarred party will not be able to bid on one set of assets (his own) or all insolvent assets,” said Renuka Sane, Associate Professor, National Institute of Public Finance and Policy.

Siby Antony, CEO and MD of Edelweiss Asset Reconstruction Company, said, “Willful defaulters’ ban is fine but leave the existing promoters’ bidding decision to the CoC (committee of creditors). Give a chance, maybe start with negative 25 marks (on evaluation).”

Edelweiss ARC is one of the leading companies in buying distressed assets.

The ordinance issued late November bars not only wilful defaulters, but also several other categories of investors such as guarantors to the debtor, those with loans classified as non-performing assets for at least a year, those convicted for any offence with a prison term of more than two years, directors in companies that have been disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.

While the 12 accounts mentioned by the Reserve Bank of India in its first watch list have received interest from large firms and investors including foreign investors, some fear, it may be difficult for SMEs to attract quality bids.

Sahoo said the choice of keeping the existing management stays with the IRPs and I don’t see a crisis in that.

“In 5-6 months, this (IBC) will bring in behavioural changes, he added.