Illustration: Sameer Pawar
What the section says
A recent amendment (Sec 29A) to the Insolvency and Bankruptcy Code bars:
1) Wilful defaulters.
2) Those who have their accounts classified as non-performing assets for a year or more and are unable to settle their overdue amounts.
3) Those who have executed an enforceable guarantee in favour of a creditor on behalf of a defaulter.
4) Connected persons.
What does this mean for a promoter?
Promoters will not be able to bid for their assets until they clear their dues. In the past, they were able to negotiate with banks and were still able to retain management control even if their stake fell below 50 percent. Guarantees on their personal assets were rarely invoked.
Is this a good step?
Yes, because promoters now need to be careful before taking excessive leverage and they are liable to be treated as any ordinary loan defaulter.
No, because this can also be seen as a code that allows the government to score political brownie points. The government leaves little room for promotors to be able to bid for their assets.
Moreover, all defaulters have been clubbed into the same bracket—the issues faced by a small supplier who hasn’t paid a ₹10 crore loan are different from those of a large steel plant with a ₹25,000 crore outstanding debt.
These amendments will save the government the blushes... those people who’ve caused insolvency
or losses to the banking system cannot be a beneficiary of the very asset that they have rendered non-performing at a reduced cost.
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(This story appears in the 22 December, 2017 issue of Forbes India. To visit our Archives, click here.)