New Delhi, Jan 2 - Declaring that the Finance Minister on large bad loan accounts of banks is neither a political nor "adversarial" issue, Finance Minister Arun Jaitley on January 2 said it is the committee of creditors who would finally decide on the viability of bids made for the bankrupt companies.
Jaitley made this point replying to the debate in the Rajya Sabha on the Insolvency and Bankruptcy Code Amendment Bill, 2017, in response to concerns raised by members regarding the percentage of "haircut" creditors, including banks, would need to take to resolve the issue of their non-performing assets (NPAs), or bad loans.
A haircut signifies lenders accepting a lower than market value for the asset in question for a resolution of the NPA.
"Ultimately, it is the creditors who will decide who a viable bidder is," the Finance Minister said regarding proposed amendments to the Insolvency and Bankruptcy Code (IBC) which seek to plug potential loopholes and prohibit certain categories such as wilful defaulters from submitting resolution plans to let them take charge of the bankrupt company through a bidding process.
"The committee of creditors is not expected to accept each and every bid. Any bid that is not viable will be rejected by the creditors," he said.
Jaitley said that of the various types of cases that have come up before the Insolvency and Bankruptcy Board (IBBI), the "asset owning companies" would not find it difficult to attract bidders.
The difficulties in resolving this "legacy issue" of NPAs that have accumulated to cross the staggering level of Rs 8.5 lakh crore arise in cases where the bankrupt companies are of the trading or engineering, procurement and construction (EPC) which either have low "recoverables" or function quite asset-light, he added.
"However, you cannot have a situation where the promoters responsible for the NPAs in the first place come in through the back door to take over the company again... so it was necessary to have an ineligibility criteria," he said, elaborating on the reasons for the amendments.
"If we had not done this, all such defaulters would have rejoiced because they would have merrily walked back to these companies by paying only a fraction of the amount, creditors would have taken their haircuts and nothing would have changed," Jaitley said.
The Bill seeks to replace an ordinance promulgated in November. Among other disqualifications, it seeks to bar those with a Reserve Bank-recognised NPA of a certain duration from participating in resolution process.
The IBC, being implemented by the Corporate Affairs Ministry, became operational in December 2016 and provides for a time-bound insolvency resolution process.
Jaitley had told the Lok Sabha last week that banks and creditors would need to take a haircut on their bad loans, even as defaulting promoters could make their businesses operational again by paying the outstanding interest on the loan.
The changes in the IBC are expected to help streamline the process of selecting buyers for stressed assets.
For instance, the Code does not specify the type of buyers who can bid for stressed assets of companies that are undergoing bankruptcy proceedings.
Certain people prohibited from submitting the resolution plan include wilful defaulters, disqualified directors, promoters or management of the defaulting company or any person who has indulged in these activities abroad.
According to the American rating agency S&P-owned Crisil, Indian banks will need to take a "haircut" of up to 60% on their bad loans to resolve the issue of NPAS, which is holding up higher economic growth.
The government has embarked on a two-pronged strategy in this regard.
On the one hand, it has brought in the Insolvency and Bankruptcy Code which provides for a time-bound insolvency resolution process. On the other hand, last year it has approved a Rs 2.11 lakh crore recapitalisation plan for state-run banks.