Insolvency law changes to widen losses for banks

Insolvency law changes to widen losses for banks

Promoters of steel companies undergoing resolution under the bankruptcy code were keen to bid for assets but will not be able to do so now after the amendments to the law, which will result in larger losses for banks, says a report.

"Promoters of most large steel companies were quite intent to regain control and did appear to offer the most competitive bid during the resolution process but are barred from doing so now," domestic brokerage Kotak Securities said in a report on Friday.

The report comes a day after government promulgated an Ordinance amending the Insolvency and Banking Code that bars promoters of companies which have defaulted for over a year from bidding for the assets being sold by the banks to reclaim their dues.

"Absence of promoter bids can potentially increase losses for banks during the recovery process as competition will lessen," the report said without quantifying it.

It also said the policy is retrospective in nature and can hit businesses coping with down-cycles or unexpected policy changes, which would make the one-year period too onerous even for honest promoters.

Stating that promoters of steel companies were keen to bid, it said the probability of a higher bid during the resolution process "now needs to be tempered".

It said most of the initial dozen resolutions being carried out under the IBC provisions involve companies who have defaulted for over a year and hence, it is "highly unlikely" that promoters in any of these companies can bid for their assets.

The amendments to the insolvency law need to be approved by Parliament in its next session beginning December 15. The changes essentially mean that certain promoters would not be allowed to bid for their own assets under the insolvency proceedings initiated to recover overdue loans.

In the first phase, as many as 12 companies, which collectively owe Rs 2.5  lakh crore or a quarter of the total bad loan mess of Rs 10 lakh crore, are under bankruptcy resolution. These companies include Bhushan Steel, Essar Steel, Bhushan Power & Steel, Lanco Infratech, Monnet Ispat and Electrosteel, Amtek Auto among others were referred by the RBI for resolution under this law.

In several of these cases, the original promoters themselves are among the bidders.

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