IBBI tightens rules on approvals of rescue proposals
Lenders will have to take into account credit worthiness and credibility of the party as part of their due diligence
NEW DELHI/MUMBAI: Promoters proposing turnaround plans for their sinking companies will be subjected to a stringent test of credit worthiness and credibility, according to changes in rules introduced by the bankruptcy regulator on Tuesday.
The same test will be applicable to any other party submitting a rescue plan for such companies.
The Insolvency and Bankruptcy Board of India (IBBI) said on Tuesday that it has amended its regulations to ensure that while clearing a turnaround plan, lenders take into account the background, credit worthiness and credibility of the party, including promoters, as part of their due diligence.
The turnaround professional appointed to put together a viable revival plan for the company has to specify in the scheme details regarding the background of the promoter or any other party proposing a revival scheme. These include any convictions, disqualifications, criminal proceedings, categorisation as wilful defaulter and any debarment by the capital markets regulator. The details should also include any transaction with the defaulting company in the previous two years.
“The latest amendment in insolvency regulations mandate that the committee of creditors and the resolution professional should take a considered and informed decision about the resolution plan taking into account the credibility and track record of the resolution applicant so that the company goes to safe hands,” said Sumant Batra, managing partner of law firm Kesar Dass B & Associates.
Under the Insolvency and Bankruptcy Code, debtors and creditors are supposed to agree to either revive the company or liquidate it in a time-bound manner.
According to R. Subramaniakumar, managing director and chief executive of Indian Overseas Bank, these steps will ensure that the system is not taken advantage of by people who are seeking a backdoor entry.
“The system is evolving and the speed at which changes are being taken will ensure that all timelines for resolution processes are met,” said Subramaniakumar.
The IBBI statement said that the changes in regulations — IBBI (Insolvency Resolution Process for Corporate Persons) Resolution Process, 2016--mandate that resolution applicants, including promoters, are put to a stringent test with respect to their credit worthiness and credibility. “Further, it also imposes greater responsibility on the resolution professional and committee of creditors in discharging their duties,” said the statement.
In June, Reserve Bank of India identified 12 accounts, making up 25% of gross bad loans in the system worth ₹7.7 lakh crore (excluding restructured loans) for immediate bankruptcy proceedings.
Industry experts have expressed concern over promoters of defaulting companies trying to regain control of these entities. This is because banks feared that promoters re-gaining control of a firm may raise doubts on the credibility of the process.
On Monday, Rajnish Kumar, chairman of State Bank of India, said it is within the legal rights of promoters to submit resolution bids subject to the condition that there has been no wrongdoing on their part in terms of wilful default or a fraud.