New amendment to Insolvency Code tabled in Lok Sabha

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The ordinance to amend the Insolvency and Bankruptcy Code has been tabled in the Lok Sabha. The main purpose of this amendment is to prevent wilful defaulters from bidding on stressed assets during the insolvency process. One of the highlights of this ordinance is that it amends the terms of eligibility for a resolution applicant.

Insolvency

The Insolvency and Bankruptcy Code was originally introduced in the year 2016 to provide strict regulations for bankruptcy proceedings. Based on the criteria outlined in the new ordinance, various personnel including wilful defaulters identified by the RBI, those prohibited from securities trading, undischarged insolvents, convicted felons with minimum two years of imprisonment, etc. are now ineligible for bidding in the bankruptcy resolution process.

This measure is mainly seen as a way to combat the issue of rising non-performing assets in the country. In the earlier process, loopholes in the law permitted certain wilful defaulters to bid on their own stressed assets and regain control over their troubled companies. The new ordinance dictates an eligibility criteria that prevents these defaulters from regaining control over their companies.

According to the government, the participation of wilful defaulters in the resolution process poses a risk to successful resolution. The government also noted that this ordinance is likely to keep away habitually non-compliant people and people associated with non-performing assets. A week ago, bankers led by SBI came up with a new resolution that bidders on stressed assets must reveal their income sources.

While strict regulations are expected to improve the bankruptcy proceedings, stakeholders associated with this process have expressed certain concerns regarding the process. They argue that keeping away promoters will lead to non-promoters bidding conservatively on these assets. Moreover, this process does not provide any leeway for small companies that genuinely want to revive their businesses.

There are plenty of troubled assets held by public sector banks in the country. Defaults on loans by corporates is considered to be one of the main reasons for surging non-performing assets in the country. The efficiency of this new ordinance in bringing down bad loans will be tested in the upcoming days.

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