A panel to review the Insolvency and Bankruptcy Code (IBC) has reportedly recommended treating homebuyers as financial creditors to provide them relief. It also wants easier rules for micro, small and medium enterprises (MSMEs) to allow well-intentioned promoters to bid for their companies that are in the insolvency row. The recommendations make sense.
The IBC does not recognise the legitimate claims of homebuyers. The proposed amendment to treat damages — for a breach of contract — as financial debt will fix the flaw. It brings it in sync with the Real Estate (Regulation and Development) Act that has created rights in favour of homebuyers and, therefore, is welcome.
Last year, the Insolvency and Bankruptcy Board of India had amended regulations to allow homebuyers to stake a claim on the amount they had paid to realtors. However, an amendment to the code is warranted to provide a statutory right to homebuyers.
The public policy goal in resolving bad loans is to maximise the realisation from selling off the assets of bankrupt entities. This goal is achieved by broadening participation in the bidding for the assets, encouraging long-term saving funds such as the Employees’ Provident Fund and the National Pension System to emulate the example of assorted private equity firms that partner operational companies to bid for the stressed assets, with a view to exiting at an opportune time, to make a handsome return on their investment.
Ruling out promoters — except in the case of fraudsters and wilful defaulters — does not meet the requirement of broadening the base of would-be bidders for stressed assets. The current set of rules that prohibit the world’s largest steel producer from participating in the bid for stressed steel assets in India are not working in the way they were intended to. The sensible thing to do is to amend the rule.
Revamp of the rules should be accompanied by concerted efforts to mobilise dormant pools of savings to take part in asset purchases that promise to lead on to windfall gains in the future.