For a deeper market for stressed assets–Economic Times–04.04.2018

Tweaks to eligibility and bidding norms under the Insolvency and Bankruptcy Code must be subservient to the core public policy goal of the process: maximising the value of the resolution asset.

This would automatically ensure achievement of other goals: minimising the haircut the banks take, reducing the recapitalisation burden on the government and on the taxpayer, and redeploying the distressed asset to those best placed to create value from it.

It is when focus shifts to other goals, such as avoiding the bad press that would arise from a promoter who ran a company into the ground walking away with the asset shorn of its debt liability, that policy begins to unravel. The policy tweaks introduced to prevent promoters making a killing also ended up barring desirable bidders. Further tweaks to make such bidders eligible carry the risk of the whole resolution process being challenged in the courts and getting stalled.

Instead of entry barriers, a superior policy option would be to widen the market for the asset under sale by roping in, or even creating, new bidders.

If promoters are part of a robust field of bidders, and the final price narrows the gap with the outstanding loan amount, the question would naturally arise as to why a promoter who can pony up the cash in post-bankruptcy bidding could not avoid the bankruptcy itself.

If the answer is in the realm of wilful default, that would be bad news for the promoter. This should be deterrent enough, rather than a formal ban on promoters. Restrictions on change of ownership are likely to depress bids.

RBI deputy governor Viral Acharya’s suggestion to set up an online trading platform for selling distressed assets to ensure transparency and better price discovery also makes sense, provided entry barriers are removed.


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