The government may tweak Section 29A of the Insolvency & Bankruptcy Code (IBC) to expedite resolution cases to also ensure that banks recover much of the amount lent as possible.The changes will include a relaxation in the 'connected person' criteria. The government may also look into demands to let promoters of defaulting companies bid for the assets, but with riders.
"It is going to be amended and there will be some dilution in Section 29A. The changes could come in before General Elections in April and May," an executive told Moneycontrol.
What's Section 29A all about?
Section 29A prevents promoters of defaulting companies from bidding for stressed assets.The Section impacted some of the biggest resolution cases, including Essar Steel. ArcelorMittal had to pay Rs 7,000 crore to clear dues of Uttam Galva Steels, the defaulting company in which the steel major had bought a stake. After clearing the dues, ArcelorMittal's bid for Essar Steel was deemed eligible.
"The introduction of Section 29A was a surprise. Its intention was right, as a promoter, who may have derailed the company, shouldn't be able to get back control at a significant haircut for banks," said Babu Sivaprakasam, Partner, Economic Laws Practice.But there have been demands to relax the 'connected party' criteria, which also bars relatives and other people deemed 'connected' to the defaulting promoter.
Again in the Essar Steel case, Numetal's bid was not clear as it was deemed to be 'connected' to the Ruias family that had founded the steelmaker."But a majority of the businesses in India are owned by families. Someone is connected to someone everywhere. So a balance is required," Sivaprakasam added.
It is feared that the criteria could lead to many companies opting for liquidation, which will increase banks' losses. This is especially true in the case of smaller companies that may not attract many bidders.
The government had relaxed the criteria for MSMEs last year, allowing promoters to bid for their companies. "But now the cap could be raised. For instance, companies with revenue of up to Rs 1,000 crore, or Rs 2,000 crore," said an executive.
Promoters' case
The promoters themselves could see some leeway coming their way.One of the recommendations to the government include a blanket ban on promoters should be removed. "Promoters shouldn’t have been completely debarred. They should be allowed, but with certain restrictions. For instance, they could be allowed to take part in the auction, but their bid should be at least 20, or 30, percent higher than the highest bid received by the banks," says Sivaprakasam.
Ultra vires
Bhushan Power & Steel's Sanjay Singal had challenged 29A, which he said is 'ultra vires' of some of the rights guaranteed by the Constitution of India. Ultra vires means beyond its legal power.Singal, who was heading Bhushan Power & Steel, had approached the Supreme Court.Bhushan Power, which owes banks Rs 45,000 crore, was admitted to the National Company Law Tribunal (NCLT) on July 26, 2017. But the IBC was amended in November last year and Section 29A was inserted."Singal has made a valid point. It is usually in criminal law that amendments are made with retrospective effect," a lawyer from a leading Mumbai-based legal firm had told Moneycontrol.Prince Mathews Thomas
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