The government has hit the refresh button on the two-year-old Insolvency and Bankruptcy Code (IBC) by bringing in a bunch of amendments to it, in order to make life easy for small debtors as well as small companies that owe money.
The intention is clear: the code should not penalize smaller players on either side in its bid to keep the insolvency process of big corporations strictly kosher. These changes are derived from the recommendations of a panel that submitted them in March after reviewing the IBC.
Perhaps the easiest change was allowing home buyers to be treated on par with financial creditors. It not only serves the purpose of keeping citizens happy ahead of a general election but also hits all the right notes at a social level. Home buyers are the most aggrieved lot among the creditors to a real estate company and anecdotal evidences of them being taken for a ride are many. Treating them as secured financial creditors ensures they get their money back.
Of course, this would not go down well with bankers as they now have to take bigger haircuts due to the additional claimants. Therefore, provisioning requirements could go up on such borrowers that have been tagged as bad. Analysts suggest that the move will come back to bite developers as bankers will ask for a higher risk premium while lending to real estate companies.
What was significant is the government is said to have made changes to Section 29A of the IBC law that bars promoters and related parties from bidding for their delinquent companies. This has now been diluted to leave out micro, small and medium enterprises.
The argument is that small businesses do not find interest from bidders and would eventually go into liquidation. Since these are more labour-intensive, it would result in an increase in unemployment. The obvious moral hazard involved is that a section of businesses are kept out of the purview of a law that should be, by definition, universally binding on all.
Crony promoters come in all sizes and leaving out small companies just ensures that it is easier to run inefficient businesses to the ground, siphon off money, and buy back the assets later on through IBC for a pittance. Thankfully, small promoters tagged as wilful defaulters will continue to be barred from bidding.
Another question that begs to be answered is that if delinquent MSMEs do not attract bidders, it simply means corporations do not see any value in those assets. Then why facilitate funnelling money into inefficient bad assets?
Other IBC amendments were largely aimed at making the insolvency process faster. Fewer lenders need to agree now to approve a resolution plan than before. An approval of only 66% of lenders as against the earlier 75% is required for critical decisions while to approve regular transactions, approval from only 51% lenders is required.
What this does is speed up decision-making, as it would essentially reduce situations where lenders dither over minor procedures thus delaying the process. Also, those lenders that have more assets at stake would tend to agree upon a plan quicker with a goal of getting the maximum value.
The IBC amendments have diluted the bankruptcy code a bit but perhaps that is a price to pay for speeding up its use in getting the highest value from an asset in the shortest possible time. And that is really the core spirit of the law.
Source: Mint