Bringing the Promoter Back

The Indian Express     16th April 2021     Save    
QEP Pocket Notes

Context: The recent changes to Insolvency and Bankruptcy Code (IBC) framework are a step towards addressing lacuna in its architecture. The code is transitioning from a creditor-centric approach.

Recent changes in the IBC Framework: Brought in a pre-packaged arrangement from Micro, Small and Medium Enterprises (MSMEs).

  • A pre-pack is an agreement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
  • Creditors will be permitted to take a pre-packaged resolution plan for an MSME for approval before the National Company Law Tribunal (NCLT) as opposed to an open bidding system under the Corporate Insolvency Resolution Process.

Critically analyzing the changes:

  • Move from transitioned from a “creditor-in-control” model of resolution to a “debtor-in-control” model of restructuring: Wresting the control from the errant promoter may sound politically appealing in a highly charged environment of corruption and cronyism.
    • Nevertheless, there are problems with a “debtor-in-control” regime, too, g. numerous cases of fraudulent activities and asset stripping do warrant scepticism of the promoter.
    • However, still, the notion that all business failure is due to the connivance of promoters needs to be reconsidered.
    • For e.g. Firms may be unable to pay their obligations simply because the economic cycle has turned. Or projects have not materialized as expected.
  • Absence of open bidding: It might raise questions over price discovery, especially if value maximization for creditors is the yardstick to measure the efficacy of IBC.

Advantages of the changes: Both promoters and creditors have strong incentives to go for this option.

  • Promoters get to hold on to their firms and exit the process with more manageable obligations, making this an attractive proposition.
  • For creditors, considering the liquidation bias in IBC, as long as the value of the restructured obligation is greater than the liquidation value, it makes sense to choose this option during economic stress.
  • Outside the framework of the central bank: And, considering that it encompasses all financial creditors, as opposed to RBI’s restructuring schemes which deal only with banks.
  • A judicial seal of approval (through NCLT) also douses concerns of questions being raised by investigative agencies in the future.
QEP Pocket Notes