New bankruptcy rules to hit banks

The amendments to the Insolvency and Bankruptcy Code ( IBC) barring defaulting promoters from bidding for their own company’s asset is expected to increase losses for banks as it would lower competition during the bidding process thereby impacting the valuation.

According to market participants, there are promoters who want to regain control over the company by offering the most competitive bids during the resolution process.

“Mandatory settlement of overdue before submitting the plan will make it difficult for promoters to bid. Optimism in bids will also dip, thereby leading to a risk of resolution now happening at a lowerthananticipated valuation. Promoters, in a bid to retain control of existing assets, would have potentially made a higher bid, thereby setting a benchmark for other bidders,” said Edelweiss Financial Services.

The government through an ordinance made amendments to the IBC code, which prohibits promoters having NPA accounts — that are more than a year old and with unpaid dues — from bidding for their own assets during the insolvency process. The move also barred the guarantors of the NPA from bidding for it.

While some experts have welcomed the ban as it sends a strong signal against crony capitalism, where promoters try to milk the banks, the market participants believe that the move will push banks into further losses.

“The absence of promoter bids could potentially increase losses for banks during the recovery process as competition would lessen,” said analysts at Kotak Securities.

“Our initial reading and recent meetings with various stakeholders suggests that the promoters in at least most of the large steel companies were quite intent to regain control and did appear to offer the most competitive bid during the resolution process. The probability of a higher bid during the resolution process now needs to be tempered,” said the analysts, adding that loss given default on loans would rise against which banks would need to set aside higher provisions.

Experts also believe that the resolution process could be delayed as fresh bids would have to be called for and there are also possibilities of promoters initiating litigation against the law.