Blocking promoters from bidding for their companies being sold under insolvency proceedings may affect the competitiveness of the process and reduce valuations, according to leading lawyers and industry consultants.
The experts have noted that disallowing promoters, owner-managers or directors whose companies have been labelled as non-performing assets for a year or more from buying back their own assets may result in consolidation within a few players. This is particularly true of the steel sector where several stressed assets presently are on the block, they said.
Such disqualified promoters are also not allowed to bid for other assets that are facing insolvency proceedings.
Insolvency and Bankruptcy Code will Dilute Process
According to lawyers, the Insolvency and Bankruptcy Code (IBC) ordinance will invalidate resolution plans that have been already filed by some promotors.
In such cases the promotors will need to settle the pending loan monies and file a fresh resolution proposal. This can be done via a white knight.
Lawyers say that some promoters could file a challenge against the IBC ordinance asking that it be made effective retrospectively.
Bahram Vakil from AZB & Partners noted that the absence of promotor bids could dilute the process and lower recovery for lenders.
Cyril Shroff of Cyril Amarchand Mangaldas echoed this view, noting that the ordinance clearly aimed to “manage the political fallout from the moral hazard of promoters” regaining control. He also warned that a “one-size-fits-all approach” would fail to distinguish between “good promoters who are in default because of bona fide business failures” and others.
Shroff further pointed out that eliminating important bidders would typically “impact price discovery”, but commercial impact would identified on a case-to-case basis.
Abizer Diwanji, partner and national leader (financial services) at EY highlighted that the emotional attachment of promotors can drive up bid values.
Legal Challenge By Promoters Likely
Several financial and legal experts are of the opinion that the government’s latest move could prove to be an economic hazard in a country which has a large proportion of family owned-companies
Diwanji noted that the IBC would allow for the first time an opportunity for “true restructuring of capital “ but it will be barred to promoters. He has said that promoters may challenge this in courts arguing that the rule was not democratic.
According to him, so far mostly any action was postponed under the assumption that “the business cycle would turn in four-five years”, leading to the current situation of “disproportionate debt to earnings.”
