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Promoters, MSMEs to get IBC relief via ordinance

IBC Ordinance 2018 likely to be promulgated in a couple of days

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To provide relief to micro, small and medium enterprises, and homebuyers stuck in incomplete housing projects, the union cabinet on Wednesday approved an ordinance to amend the Insolvency and Bankruptcy Code (IBC).

Homebuyers will now get the status of a financial creditor during the insolvency and bankruptcy court proceedings of the real estate companies. This will make it easier for them to recover their investments in a housing project.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, likely to be promulgated in a couple of days after getting President's assent, will also provide relief to the micro, small and medium enterprises (MSMEs) and also relax some eligibility rules for submitting a resolution plan.

"The cabinet has approved the ordinance," minister for Law and Justice Ravi Shankar Prasad told reporters after the cabinet meeting but declined to share details on the changes as the President's approval is awaited.

The changes, aimed at increasing pool of bidders for stressed assets, will streamline the current insolvency process, government sources said.

The ordinance has cleared the air around the homebuyers' status, sources said. The homebuyers have been granted the financial creditor's status, placed right after the banks for liquidation. As of now, flat owners fall under both operational as well as financial creditor's category depending on the nature of the project based on assured returns.

The MSME promoters, whose account have been classified as a non-performing asset (NPA) for one year, will now be able to present a resolution plan, sources said. Such promoters were earlier eligible to participate only if they cleared all the dues. If such a promoter has provided guarantee and has not been able to pay will also be allowed to participate in the resolution process for the MSME. Fast track mechanism aimed at helping small firms is also there.

The clause 29A related to the conviction of a promoter has been relaxed to allow a person who has been convicted six years prior to submitting a resolution plan to participate in bidding. "A person convicted within six years from the date of submitting a resolution plan will not be eligible to participate in the bidding. However, if a promoter has been convicted earlier than six years, the person will be allowed to take part in the insolvency proceedings," sources said.

The ordinance will also allow settlement of disputes outside the court if 90% lenders on the Committee of Creditors (CoC) are in agreement. Currently, 75% of the CoC members have to agree on it. The voting threshold has been recalibrated to help promote resolution over liquidation.

The current requirement for getting a resolution plan approved has also been eased. The number of votes required to approve to get a plan approved by the committee of creditors (CoC) has been brought down from the current 75% to 66% for critical decisions, sources said.

The government has also relaxed another provision related to section 29A of the IBC to allow financial institutions to participate in the resolution process, bringing them on par with banks, sources said. "Financial institutions such as Non-banking Financial Companies (NBFCs) and private equity firms like banks convert debt of a firm into equity when it becomes unsustainable," sources said. The current provisions bar anyone associated with a promoter from bidding for stressed assets of over one year.

The amendments, being implemented through the ordinance, are largely based on the recommendations of the Insolvency Law Committee, except in a few cases. The panel submitted its report to the Ministry of Finance and Corporate Affairs more than a month back.

...& ANALYSIS

  • Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018, is likely to be promulgated in a couple of days after getting President's assent
     
  • Homebuyers have been granted the financial creditor's status, placed right after the banks for liquidation
     
  • MSME promoters, whose account have been classified as a non-performing asset (NPA) for one year, will now be able to present a resolution plan

HOW KEY STAKEHOLDERS WILL BENEFIT

Relief for MSMEs

  • MSME promoters with NPA of 1 yr to be allowed to bid
     
  • Promoters who fail to pay personal guarantee can also bid for MSME assets

Changes in Section 29A of IBC

  • Promoter, if convicted 6 years before submitting resolution plan can bid
     
  • To allow financial institutions to bid, bringing them on par with banks

Other changes

  • Settlement of disputes outside court if 90% lenders on CoC agree
     
  • Voting share of CoC to be brought down from current 75% to 66% for critical decisions
     
  • Fast-track mechanism for smooth exit to stay
     
  • Threshold limit for filing resolution application to be kept at Rs 1 lakh

More pointers

  • Rs 4.12 lakh cr
    - Stressed assets in NCLT
     
  • Rs 9 lakh crore
    - Locked up in NPAs accumulated by banks
     
  • 12 accounts responsible for 25% of bad loans on bank balance sheets
     
  • Rs 36,400 cr
    - Banks recover from Bhushan Steel resolution, besides 12% equity stake
     
  • RBI has referred stressed companies to NCLT through two lists
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