But, instances of the possibility of promoters wresting back control of a company under the insolvency process have anxious banks. The move is aimed at ensuring that such attempts at backdoor entry in the guise of resolution applicants are prevented, they said.
According to a report in the Times of India, the ordinance will indeed have the provision to bar bidding by wilful defaulters.
Currently, there is no bar in the law to check promoters to bid and regain control of companies facing insolvency proceedings.
"Some changes are proposed in the code and it is being done by way of an ordinance", finance minister Arun Jaitley told reporters after the cabinet meeting on Wednesday. The government opted for the ordinance route weeks before the winter session of Parliament as some defaulting cases are likely to come up for resolution soon. "The whole process (of resolution) is at an advanced stage and therefore you want the process to go on the right track", Jaitley said.
A new section will be incorporated into the Code which would, inter alia, include proscribe "wilful defaulter, undischarged insolvent, disqualified director, a person who has indulged in preferential transaction or under-valued transaction or fraudulent transaction" as determined by the Adjudicating Authority.
Also ineligible are those who are promoters or in management of control of the resolution applicant, or will be promoters or in management of control of corporate debtor during the implementation of the resolution plan, the holding company, subsidiary company, associate company or related party of the above referred persons, the statement said. "The Insolvency and Bankruptcy Board of India (IBBI) has also been given additional powers", the ministry tweeted. The revised regulations ensure that applicants, including promoters, are put to a stringent test with respect to their credit worthiness and credibility, prior to the approval of a resolution plan.
But it is not clear whether existing promoters who are not wilful defaulters would be allowed to bid for their own companies despite running up a huge debt that have turned into non-performing assets (NPA) for banks.
The Insolvency and Bankruptcy Code, 2016, provides for time-bound "Insolvency Resolution" to release assets locked up in NPAs and promote maximisation of value of assets, failing which, underutilised resources of unviable business are released through liquidation. However, an amendment to the code was needed as curbs on promoters bidding would not have held up in courts otherwise.
The Ministry of Corporate affairs recently set up a 14-member committee to identify and suggest ways to implement IBC effectively. Advisory KPMG India's partner Sanjay Doshi said that insulating the insolvency process from undue influence is critical for its success.
Along with other steps towards improving compliances, actions against defaulting companies to prevent misuse of corporate structures for diversion of funds, reforms in the banking sector, weeding out of unscrupulous elements from the resolution process is part of ongoing reforms of the Government.