Debarring promoters from bidding for their own companies placed on the block in insolvency proceedings would dilute the competitive process, suppressing valuations, said lawyers and consultants.
They also said that disqualifying promoters, directors and owner-managers connected to companies that have been declared as non-performing assets for one year and more from buying back the assets facing bankruptcy action would lead to consolidation in the hands of few players, especially in the steel sector where quite a few entities are set to go under the hammer. Besides being barred from submitting a resolution plan for their own companies, these disqualified promoters will not be allowed to bid for other assets facing insolvency proceedings.
Lawyers said that in cases where some promoters, who have already filed resolution plans, the Insolvency and Bankruptcy Code (IBC) ordinance would invalidate their proposals. In that case, these promoters will have to settle the overdue amount and then file a fresh resolution plan. They could do so by bringing in a white knight prior to the resolution process and settle the overdue amount. Lawyers said that some promoters could challenge the IBC ordinance arguing that these should be effective retrospectively.
Bahram Vakil of AZB & Partners said that the lack of strong promoter bids could dilute the competitive process between the remaining resolution applicants, lowering the recovery for lenders. Cyril Shroff of Cyril Amarchand Mangaldas too has a similar view. “The purpose of the ordinance is clearly to manage the political fallout from the moral hazard of promoters coming back into the saddle. Using a one-size-fits-all approach it does not distinguish between good promoters who are in default because of bona fide business failures and others. The commercial impact would be a case-by-case determination. Taking a key bidder out of the action would ordinarily impact price discovery. Though in specific cases, the impact may not be much if there are lots of good bidders,” Shroff told TOI.
“Promoters think more emotionally and would drive up the bid to retain control of their business,” said Abizer Diwanji, partner and national leader (financial services) at EY. There is a rising feeling in Mumbai’s financial and legal circles that the government’s political grandstanding could pave the way for an economic hazard in a country where most enterprises are family ownership driven.
According to Diwanji, the IBC for the first time provides the opportunity for true restructuring of capital which is being denied to promoters. He added that promoters might challenge this legally on the grounds that it is not democratic. “Until now most action was really kicking the can down the road as everybody thought that the business cycle would turn in four-five years. That is how we have built this huge disproportionate debt to earnings,” he said.”The absence of promoter bids could potentially increase losses for banks during the recovery process as competition would come down. Moreover, the probability of any promoter participating in any insolvency and bankruptcy process looks unlikely as this policy is to be retrospective in nature,” said M B Mahesh, analyst, Kotak Institutional Equities, in a report. This could also hit businesses coping with downcycles or unexpected policy changes, which would make the period of one year too onerous even for honest promoters, the report added.
Kunal Shah, associate director, Edelweiss Financial Services, said that the development will be negative for banks given probability of higher haircuts (on cases referred to National Company Law Tribunal) and delay in resolution process. Shah said that the optimism in bids will dip leading to a risk of resolutions now happening at lower-than-anticipated valuation. “Promoters, in a bid to retain control of existing assets, would have potentially made a higher bid, thereby setting a benchmark for other bidders. There is a likelihood of delay in resolution process as fresh bids will have to be called for or promoters could initiate litigation against the law,” Shah said.
The other challenge for lenders would be in conducting rigorous due diligence to ensure that defaulters do not participate. While bankers say that there are enough bidders for the 12 large cases referred to the NCLT at the instance of the RBI, the challenge is in resolving smaller loan accounts. “We are waiting to see if the RBI insists on initiating insolvency proceeding against the second list of 29 companies,” said a senior official with a private bank.