Is barring promoters from bidding for their distressed assets wise?

The government has in a hurry promulgate an ordinance to amend the Insolvency and Bankruptcy Code (IBC). The indirect aim of this amendment is to keep out the promoters of the distressed steel company from bidding for their assets during the ongoing insolvency proceedings.

RBI had referred five steel companies to the National Company Law Tribunal (NCLT) including Bhushan Steel, Bhushan Power & Steel, Electrosteel Steels, Essar Steel and Monnet Ispat & Energy. These companies are accountable for approximately Rs. 1,44,400 crore in the form of NPAs to the banks. Despite this fact, the promoters of these companies are still interested in retaining control of their assets. On the other hand, domestic steelmakers including Tata Steel, JSW Steel and multinationals including Arcelor Mittal, Vedanta, POSCO and also ace investors like Ajay Piramal, PE investors and domestic ARCs companies are also interested in acquiring these distressed assets.

But this ordinance to amend IBC is more a measure to exhibit the government's willingness to bring in fiscal discipline by punishing non-compliant borrowers, who choose to default rather than pay back their loans. It specifically aims to bar individuals and organization who are termed wilful defaulters or are associated with NPAs (non-performing assets) or have a history of habitual non-compliance.

However, it can be debated as to whether it is wise to exclude a promoter who knows a company more than any outsider and is it possible to revive a company without the active participation or the involvement of its promoters. Or basically, is it right to punish a promoter in this manner which is can be viewed as a cycle of karma.

Also, excluding the promoter might do a disservice to the process of getting the right value for the distressed assets. There is an understanding that if the promoters team up with new investors, especially foreign investors, they can better drive a company toward a turnaround than anybody else.

In all, this move is more to instil a fear of default and maintain a prudent credit culture in the country, which will thereby empower institutional lenders and banks.