The rules set to implement the Insolvency and Bankruptcy Code would appear to be in conflict with the public policy goal of securing the highest value for the distressed asset under resolution. The Insolvency and Bankruptcy Board of India (IBBI) must step in to have the rules modified, lest the whole resolution process gets stymied in litigation as creditors sue the authorities for having been cheated out of potential repayment because of deficient rules. The Ahmedabad bench of the National Company Law Tribunal (NCLT) has reportedly deemed the second round of bids for Essar Steel as invalid and directed creditors to review the first set of offers from Numetal Mauritius and Arcelor-Mittal. The order came after both the bidders approached the tribunal, arguing that their bids should be deemed eligible and a second round of bids should not be entertained.
The NCLT has gone by the rulebook. The extant norms do not allow multiple rounds of bidding that help in the discovery of the best possible price, minimising the haircut that lenders have to take. A course correction is warranted, but cannot be done by the NCLT. The regulator, IBBI, must recognise that the nascent bankruptcy law is still being tested. It should amend the rules to allow for multiple rounds of bidding for distressed assets. The status quo would make the outcome sub-optimal. Banks are putting the bankruptcy code to use to reduce their bad loans and clean up their books. The public policy goal is to reduce the haircuts that banks need to take, lower the recapitalisation burden on the government and the taxpayer, and redeploy the asset to those who can create maximum value from it. So, the case to change the rules to align it with these goals is compelling.
If the rules for disposal of assets under the IBC restrict the market for assets and depress the value below what could potentially be obtained through better designed rules, the rules should change—transparently and fast. The IBC is path-breaking reform that will improve corporate conduct in the country. It should not be stymied by ill-thought-out rules.
via IBBI must thwart bankruptcy getting stymied