MSME promoters get insolvency relief

NEW DELHI: The government on Wednesday proposed to ease curbs on promoters of micro, small and medium enterprises (MSMEs) from bidding during the insolvency process to take over a company, while tightening rules for “related parties” in larger companies.

The Cabinet, which has recommended the promulgation of an ordinance to amend the Insolvency and Bankruptcy Code (IBC), has suggested that promoters of companies with turnover of up to Rs 250 crore will be allowed to bid. The government also plans to insert a clause to provide a debt threshold, which will ensure that those with large stock of loans but low turnover do not misuse the carve-out, sources told TOI.

A committee headed by corporate affairs secretary Injeti Srinivas had made a case for the relaxation, arguing that the business of an MSME attracts interest primarily from a promoter and may not be from other resolution applicants.

With few takers, several businesses would have to go into liquidation, prompting amendments to section 29A of IBC. “The special dispensation for MSMEs will not only help them turn around, but turnaround faster,” said an official.

Promoters of all companies were barred from bidding as the government feared that they will walk away with the stressed assets at a discount.

Through the ordinance, the government proposes to make it tougher for “related party” of individuals, where the relative of a promoter, who was not part of the group earlier, gets to bid. In the Essar Steel case, Rewant Ruia’s partnership with bidder NuMetal had raised eyebrows as he is the son of Essar Group vice-chairman Ravi Ruia.

At the same time, there is some respite for financial services companies, which can convert a part of their loans into equity and they will not be treated as a ‘related party’. Similarly, exemption is proposed for a resolution applicant or a successful bidder for an ailing company, which acquires a distressed asset with an NPA account for three years.

A proposed key change is to recalibrate the voting threshold for various decisions of the committee of creditors (CoC). The government has said the current voting rights share of 75% of CoC for a decision to go through be reduced to 66% for decisions such as appointment or replacement of resolution professional, approval of a resolution plan, passing a resolution for liquidation and extension of the corporate insolvency resolution process. IBC provides for a resolution within 180 days, with a possibility to extend the deadline to 270 days. But, in several cases such as Jaypee Infratech, the deadline is over and will need to be extended as the Supreme Courthas ruled out liquidation as an option, given that around 18,000-20,000 home buyers are yet to get apartments. Further, the ordinance has proposed to facilitate implementation of the resolution plan by the successful bidder. It has provided a year to obtain necessary statutory clearances from central, state and other authorities.

There are some administrative changes to the law that have also been proposed. For instance, the Insolvency and Bankruptcy Board of India’s mandate will be widened to expand its development role, while allowing it to levy fees and other charges for some of the activities.

While the ordinance was pending with the cabinet for several weeks, it decided to quickly move in after Tata Steel announced that it was completing the acquisition of Bhushan Steel, the first high-profile case to be resolved under IBC.