There is no reason to restrict the debate on expanding the cast of would-be buyers for assets auctioned off under the Insolvency and Bankruptcy Code to whether the promoter of the distressed company should be allowed to participate in the bidding or not. If the promoter is barred — which is currently the case — and his rival in the industry gets to buy up the distressed assets for a song, that would represent an undesirable outcome. The short point is, the focus has to shift to ensuring sufficient competition in the bidding for the distressed assets, to lower the haircuts creditors have to take, away from who gets to bid for the distressed assets.
If steel capacity is being sold at a fraction of the cost of setting up new capacity, it makes eminent sense for a financial investor to pick up the assets and sell it later on, to make a killing. If such financial investors are not available, they should be created. There is every reason for the Employees’ Provident Fund (EPF) and the National Pension System (NPS) to set up special funds to take part in the bidding for distressed assets. Public enterprises should be encouraged to pool their considerable surpluses and bid for the assets.
Banks could themselves set up special purpose vehicles and buy up the assets, possibly enter into management contracts with steelmakers or power generators, as the case may be, run the steel mills and power plants they buy in the resolution process and sell them later at a profit. A competitive market has to be created for the assets in question, if it does not come into being on its own.
If promoters take part in the bidding as part of a competitive market for distressed assets, the government could stop worrying about moral hazard and focus on minimising the hit banks will take. After all, if the assets are sold cheap, public money has to cough up the additional capital the banks will need.