What is the issue?
- Insolvency and bankruptcy code (IBC) was introduced to address the bad debt issues.
- But there are some areas of concern which allows existing promoters to game the system.
What is the significance of IBC?
- As the Indian financial sector faces a serious problem with bad debt, a ray of hope on the horizon is the modern insolvency process.
- The mechanism is closely supervised and time-bound, and the first test cases are winding their way through it at the moment.
- It is generally hoped that the new law will permit speedy and efficient resolution of many such cases.
- In appropriate ones, assets will be revived under new management.
- This will help clean up the private sector in a sense with weak promoters, owners and managers being replaced by new ones who will turn some of these distressed assets into profitable ventures.
What are the areas of concern?
- If even after this new process, it appears that existing promoters of troubled companies somehow manage to retain control or have some sort of advantage in the retention of such control.
- There are increasing number of voices raised that the system could be gamed by existing promoters.
- Naturally, if the existing promoter is the best or the only possible alternative, and all that is needed is a reasonable renegotiation of terms, then banks are perfectly justified in considering that option.
- Certainly, this is not illegal under the insolvency and bankruptcy procedure.
- However, it is it is imperative to have a mechanism to ensure there is, in fact, no undue preference being accorded to existing owners.
- That will only kick the problem of bad loans down the road, precisely what the new insolvency law is designed to avoid.
What needs to be done?
- Banks, must ensure the widest possible set of management and ownership structures is considered.
- The priority must be not just the preservation of capital in each case but also its efficient management in the future.
- If the former owner makes the best bid for a stressed asset then the second best bidder should be asked if he is willing to match it and, if so, he should be allowed to take over.
- Such a setup will ensure that the system is not being gamed by the existing owners while also not foreclosing any opportunity for reviving an asset that has a possibility of recovery.
- The recovery from the slowdownrequires banks to take reasonable haircuts while preserving capital.
Source: Business Standard
