Don’t create entry barriers for promoters–Economic Times–27.11.2017

The insolvency Ordinance will not be an optimal solution if its implementation doesn’t recognise three crucial factors. First, all efforts must be made to allow well-intentioned promoters to bid for their companies that are in the insolvency row. Keeping them out through a maze of rules doesn’t conform to best global practices. It will likely result in lower bids, as banks fear, and it makes policy seem more moralising than logical. So, it’s important that there’s complete clarity that if a promoter is willing to pay 100% of the final sale price in cash upfront, he should be allowed to bid. To be sure, conditions like strict personal guarantees, hypothecation of tangible assets that are, say, twice the value of the loan can be incorporated.

Parenthetically, preference should be given to bidders who put up larger upfront cash payments than to those wanting a more staggered payment schedule. The point is, promoters, except those accused of fraud or wilful default, should not face entry barriers.

Second, and related, the rule that keeps out those whose loan accounts have been classified as non-performing assets (NPA) for more than a year, needs to be relaxed. This has come too late in the day and can create a big hurdle in terms of bidding participation. The one-year rule seems arbitrary. There can be cases where a business has gone bad for perfectly genuine reasons and an entrepreneur who, say, had three bad years is not someone who can’t get a second chance. Also, since the bad loan problem has been building up over a few years, allowing only businesses with less than year-old NPA accounts seems unrealistic.

Third, and this is for those arguing that promoters who have ‘run their businesses to the ground’ should be penalised, the insolvency debate must recognise that delay in policymaking or mid-course changes have often contributed massively to businesses going bad. When governments cancel mining licences or change gas pricing norms, capital-intensive businesses with a lot of money locked in project costs can take a severe hit. Making businesses the villain won’t solve insolvency. Being logical will.

This piece appeared as an editorial opinion in the print edition of The Economic Times

via Don’t create entry barriers for promoters

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