When Binani Cement moved the Supreme Court seeking to exit the resolution process under the Insolvency and Bankruptcy Code (IBC) overseen by the National Company Law Tribunal (NCLT), the court made it clear that the law does not permit forum shopping: once the company has entered the NCLT process, it must complete that process. This, in our view, is entirely in agreement with the spirit of the IBC.
However, the procedure that has been followed for resolution under the IBC stands exposed as being flawed. The procedure was incapable of discovering the highest valuation for the asset being auctioned.
A value higher than the highest discovered under the IBC process was offered for the distressed company outside the IBC process, to enforce which Binani approached the Supreme Court. The way ahead is clear. The IBC process must be amended to realise the public policy goal in resolving a bad asset: secure the highest value for the asset being resolved, so that the creditors of the bankrupt company realise their dues, and if there is anything left after paying off all secured and unsecured creditors, the shareholders, too, get back some part of their capital.
Realising the highest value for the asset is crucial to minimise the bank-recapitalisation burden on the exchequer and the taxpayer as well as to incentivise optimum use of the asset by the buyer who invests to acquire the asset. The way to realise the public policy goal in resolving bad assets is to dump all scorecards in evaluating bids and be guided solely by the price being paid. And the price discovery should be through continuous bidding until all save one bidder drops out, as is done in spectrum auctions.
The IBC is a crucial instrument in ridding the economy of crony capitalism. It is a new law and some procedural improvements will be found necessary during its implementation. The NCLT should adopt such improvements, not be bound by a rule whose flaws have been demonstrated. It should not set an unhappy precedent.
Let the bidding begin afresh for Binani within the NCLT framework.
This piece appeared as an editorial opinion in the print edition of The Economic Times.