Mumbai, November 24: Tweaking of insolvency and bankruptcy norms by the centre to prevent willful defaulters from bidding for stressed assets is likely to push early resolution of the insolvency process, experts said on November 24.
They are also of the opinion that this would provide a fair chance to promoters, who had defaulted in servicing loans due to systemic reasons, to retain their assets. However, concerns over undervaluation of asset have been flagged up by bankers.
“This is a welcome move. Logically, promoters who had every intention to pay back the loan amount to lenders but could not do so due to reasons like economic downturn, raw material shortage should get a chance to bid,” D Ravishankar, founder director of Brickwork Ratings told ‘The Finapolis’.
He also said that centre’s move to debar willful defaulters would help in finding out a sustainable solution to the bad loan problem faced by the banking industry.
Centre pronounced an ordinance on November 22 amending insolvency and bankruptcy code that barred willful defaulters from bidding for stressed assets during insolvency proceedings.
This ordinance received nod from the President on November 25.
As per the changed norm, not only willful defaulters; but also guarantors to the debtor, borrowers with loans classified as non-performing assets (NPAs) for one year or above, those convicted of any offence with a prison term of more than two years, directors in shell companies, entities barred by Sebi, people involved in fraudulent transactions with the firm and associates are also not allowed to bid for stressed assets.
However, lenders and investment bankers are concerned over possible undervaluation of the asset if the promoter is not allowed to participate in the resolution process.
“It’s a good move by the government. Willful defaulters and promoters indulging in fraudulent activities should be debarred from bidding during insolvency proceedings,” Swapnil Mahajan from Karvy Investment Banking said. However, this may lead to undervaluation of the asset in case the promoter is not allowed to bid for regaining control of his asset. Situation will also be tricky if there are no bidders for a stressed asset.
The Reserve Bank of India had put out a defaulter list of 12 largest NPA accounts in June in its push to solve the bad loan problem faced by banks. Out of these accounts, resolution process is in advanced stage in 11 accounts.
With changed norms, promoters now have to turn their non-performing accounts to standard by repayment of dues, which will then enable them to bid for the assets.