Changes put in place by the Insolvency and Bankruptcy Board of India (IBBI), to ensure credibility of the debt resolution process, could increase the burden on insolvency resolution professionals (IRPs), experts have said.
On Tuesday, the IBBI said it has amended its regulations to ensure that lenders take into account the background, credit worthiness and credibility of bidders, including promoters, as part of their due diligence, while clearing a turnaround plan.
“This (amendment) shall make sure that only viable and credible resolution plans make their way to the table of the committee of creditors. (But it) will surely increase the burden of the resolution professional, who is already struggling with his wide scope of responsibilities, said Rakesh Nangia, managing partner, Nangia and Co. Llp, a firm involved in insolvency work.
Sumit Binani, an independent IRP, concurred with Nangia’s views.
“These amendments also come from the thought process that a defaulter or a wilful defaulter should not be allowed to bid for the project where the lenders need to take a haircut and the promoters gets control of the company on a discount,” Binani said.
Binani sees the possibility of an increase in legal battles as promoters challenge any observations by IRPs.
Some bankers have said that it is legal for promoters to submit resolution plans, subject to the condition that there has not been any wrongdoing in terms of wilful default or fraud on their part.
Other lenders have expressed concerns as it could potentially lead to defaulting promoters re-gaining control of the firm.
Synergies Dooray Automotive Ltd, the first case resolved under IBC, is a case in point.
As a 14 September Mint story reported, the resolution plan for Synergies Dooray involved merging the company with Synergies Castings Ltd, a creditor and related party.
Synergies Casting, which had held 75% of debt of the defaulter, transferred a significant chunk of loans to a non-related party called Millennium Finance Ltd.
This, according to Edelweiss Asset Reconstruction Co., which has appealed against the resolution, enabled Synergies Castings to put in place a proxy in the creditor committee.
However, lenders say that availability of data to verify the credibility of bidders will not be a problem because banks have data on wilful defaulters as well as non-cooperative borrowers.
“As and when required, IRPs can also seek help from external agencies for due diligence. It will be time consuming but it would ensure that there are no grey areas. The only issue would be when there are foreign funds. Then the whole process of background check will become more tedious. But there will be not much of issue when there are domestic bidders,” said R.K. Takkar, managing director (MD)and chief executive officer (CEO) at UCO Bank.
Source: Mint