New IBC Code could bar clean bidders as well: Stakeholders
May have certain unintended consequences too
MUMBAI: The amendment to the Insolvency and Bankruptcy Code (IBC) that aimed at preventing errant founders from regaining control of their assets may have the unintended consequence of barring clean bidders too, said various stakeholders.
The executive order bars not only wilful defaulters, but also several other categories such as guarantors to the debtor, those with loans classified as non-performing assets (NPAs) for at least a year, directors in companies that are disqualified, entities barred by the capital markets regulator, those who have been found to have struck fraudulent transactions with the firm, and connected entities.
The connected entity definition includes a “related party” too. Under the Code, a related party includes relative of directors and key managerial personnel of corporate debtors and any person who controls more than 20% of voting rights in the corporate debtor.
A November 27 BloombergQuint report cited the example of Sajjan Jindal-promoted JSW Steel Ltd as a possible casualty of this rule. Sajjan Jindal is the brother of Naveen Jindal whose company Jindal Steel & Power Ltd was pronounced a non-performing asset. He is also the brother-in-law of Sandeep Jajodia, the promoter of Monnet Ispat and Energy Ltd, a company undergoing resolution under the Code.
“There is no problem for any bidder whose promoter has not defaulted. Promoter has to be considered, according to the Sebi (Securities and Exchange Board of India) regulations,” said Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel. Sebi rules defines a promoter as someone who holds 10% or more in and are in control of the issuer (company); or is instrumental in the formulation of a plan after listing.
A government official familiar with the matter said that the ordinance was aimed at providing a level playing field to all applicants.
‘“All prospective resolution applicants and those connected with them are required to pass the litmus test of not attracting any of the ineligibility conditions,” said the official. Even those whose accounts have been declared NPAs for over a year have been given a window of opportunity to overcome the ineligibility clause by paying up the overdue (including interest and other charges), this person said on condition of anonymity.
According to Mamta Binani, an insolvency resolution professional the most important clarification needed is on ‘overdue’ amount. The amendment says that anyone who have their accounts classified as bad loans for more than a year and unable to settle their overdue amounts before submission of the resolution plan is barred from bidding.
“Does the overdue amount mean the entire loan amount or just what was due in the current instalment. Because when an account turns NPA, the total amount is recalled. This clarification will be very critical,” said Binani. “The ineligibility period needs to exclude the period of insolvency proceedings because once an insolvency commences a promoter cannot pay any dues.”