(Bloomberg) -- India tightened rules to prevent errant founders from misusing an 11-month-old bankruptcy law to regain control of delinquent companies that are being sold.
Founders of companies whose borrowings have been classified as non-performing for a year or more and that are unable to pay overdue amounts, including interest and charges, are barred from repurchasing their assets, the corporate affairs ministry said in a statement. The latter category would include bad loans totaling about $31 billion extended to the country’s 12 top delinquent firms, that lenders are seeking to sell by March.
A change in the Insolvency and Bankruptcy Code, that was passed by India’s parliament in 2016, comes at a time when about 50 of the nation’s biggest defaulting companies face insolvency proceedings and may be sold by court-appointed professionals over the next year. That necessitated an executive order to prevent “habitually non-compliant” people from regaining control of these companies, according to the statement. The President signed the ordinance on Thursday, making the law effective immediately.
“This change in law will not bring down the valuation as there is adequate interest from buyers,” said Rajnish Kumar, chairman of India’s largest lender State Bank of India. “If the law is clear and explicit it will help. Evaluation of the bids will be transparent.”
Steel manufacturers, power and construction companies dominated an initial list of 12 borrowers that Indian banks were ordered to refer to insolvency courts over bad loans of more than 2 trillion rupees ($31 billion). The central bank followed with a list of about 40 companies, which need to be referred for insolvency unless a restructuring is worked out before Dec. 13.
Wilful defaulters, those who have given an enforceable guarantee for a corporate undergoing insolvency or liquidation as well as promoters or management connected to them are also barred from bidding in bankruptcy proceedings, the finance ministry statement said. Wilful defaulters are defined as those firms that didn’t repay loans while having the capacity to do so, or those in which controlling shareholders siphoned off money or assets.
The modifications need to approved by parliament in its next session.
While the Insolvency and Bankruptcy Code is being tweaked to stop misuse, it doesn’t ban all founders from the sale process. Some owners had written to the government blaming adverse business cycles for their inability to repay, saying it wouldn’t be fair to ban them.
“The ordinance aims at putting in place safeguards to prevent unscrupulous, undesirable persons from misusing or vitiating the provisions of the code,” according to the statement. Reforms by the government “would help strengthen the formal economy and encourage honest businesses and budding entrepreneurs to work in a trustworthy, predictable regulatory environment.”
Prime Minister Narendra Modi’s regime last year overhauled Indian bankruptcy laws that dated back a century. The new law is one of the biggest steps in India’s battle to clean up $207 billion of stressed assets. The inability to shut loss-making companies and collect on dues had locked up funds at banks and damped lending and investment.
The changes will “make things difficult for unscrupulous promoters,” Kalpesh Mehta, a Mumbai-based partner for Deloitte Haskins & Sells LLP’s financial-services practice, said in an email. “There is now a real chance that promoters can lose control and are no longer in a position to take creditors for a ride.”
©2017 Bloomberg L.P.
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