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Keeping promoters out could hit bankruptcy process, say lawyers Courtesy :

Debarring promoters from bidding for their own companies placed on the block in insolvency proceedings would dilute the competitive process, suppressing valuations, said lawyers and consultants.

They also said that disqualifying promoters, directors and owner-managers connected to companies that have been declared as non-performing assets for one year and more from buying back the assets facing bankruptcy action would lead to consolidation in the hands of few players, especially in the steel sector where quite a few entities are set to go under the hammer. Besides being barred from submitting a resolution plan for their own companies, these disqualified promoters will not be allowed to bid for other assets facing insolvency proceedings.

Lawyers said that in cases where some promoters, who have already filed resolution plans, the Insolvency and Bankruptcy Code (IBC) ordinance would invalidate their proposals. In that case, these promoters will have to settle the overdue amount and then file a fresh resolution plan. They could do so by bringing in a white knight prior to the resolution process and settle the overdue amount. Lawyers said that some promoters could challenge the IBC ordinance arguing that these should be effective retrospectively.

Bahram Vakil of AZB & Partners said that the lack of strong promoter bids could dilute the competitive process between the remaining resolution applicants, lowering the recovery for lenders. Cyril Shroff of Cyril Amarchand Mangaldas too has a similar view. “The purpose of the ordinance is clearly to manage the political fallout from the moral hazard of promoters coming back into the saddle. Using a one-sizefits-all approach it does not distinguish between good promoters who are in default because of bona fide business failures and others. The commercial impact would be a case-by-case determination. Taking a key bidder out of the action would ordinarily impact price discovery. Though in specific cases, the impact may not be much if there are lots of good bidders,” Shroff told TOI.

“Promoters think more emotionally and would drive up the bid to retain control of their business,” said Abizer Diwanji, partner and national leader (financial services) at EY. There is a rising feeling in Mumbai’s financial and legal circles that the government’s political grandstanding could pave the way for an economic hazard in a country where most enterprises are family ownership driven.

According to Diwanji, the IBC for the first time provides the opportunity for true restructuring of capital which is being denied to promoters. He added that promoters might challenge this legally on the grounds that it is not democratic. “Until now most action was really kicking the can down the road as everybody thought that the business cycle would turn in four-five years. That is how we have built this huge disproportionate debt to earnings,” he said.

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