In a move that will stymie the attempts of promoters to use the insolvency process to pare their debt burden and take control of the assets again, the Insolvency and Bankruptcy Board of India (IBBI) has proposed a more elaborate disclosure regime for bidders. According to a discussion paper floated by the IBBI, prospective buyers of an insolvent company under the corporate insolvency resolution process (CIRP) will be required to disclose beneficial owners while applying for the takeover.
The move is in the wake of widespread belief that a sizeable number/quantum of assets that came under insolvency resolution has gone back to the hands of delinquent promoters, who used proxies and complex corporate structures to conceal their identities.
As per the IBBI’s proposals, the prospective buyers will have to provide “a statement of beneficial-ownership in a format specified by the IBBI, covering details of all natural persons who ultimately owns or controls the PRA (prospective resolution applicant), together with the shareholding structure and jurisdiction of each intermediate entity.”
Besides, the prospective buyers will have to submit an affidavit disclosing whether they are eligible for the benefits outlined under Section 32A of the Insolvency and Bankruptcy Code (IBC). Section 32A provides immunity to the new buyer from prosecution for offences committed prior to the commencement of CIRP, subject to satisfaction of specified conditions.
“Even though Section 29A of IBC prohibits certain individuals and entities, particularly those responsible for a company’s insolvency, from bidding for a distressed asset, it does not require disclosure of beneficial ownership details of the prospective buyers. This document will strengthen the disclosure norms, and make it difficult for former promoters to submit indirect bids and whitewash their liabilities,” said Devendra Mehta, partner at PwC.
Vijay K. Singh, senior partner at S&A Law Offices said that this document will cure a lot of defects that exist in the current IBC system. “Presently, there’s no way for the resolution professionals (RPs) and committee of creditors (CoC) to know who controls the entity bidding in the resolution process, and whether there’s any criminal proceeding/s going on against such a bidder. This notification will correct such lacuna,” he said.
However, some experts said that this could also discourage some kinds of foreign entities from participating in the CIRP.
“The Code allows foreign entities to bid for the distressed companies. But some foreign entities are structured in a way that at every stage, they are bound by confidentiality. On the other hand, the focus of the government is to ask for more disclosures. This will discourage some foreign entities,” said an insolvency lawyer.
In addition, the IBBI has said that if the prospective resolution applicants (RPAs) or the persons having controlling interest is a listed entity, a listed subsidiary, or an entity resident in a notified jurisdiction, they are exempted from furnishing granular shareholder details. That’s because of there’s sufficient public disclosures of shareholding and control that are already available under the Sebi (LODR) Regulations, 2015.
“The institutional investors governed by foreign confidentiality norms may find the required natural person-level disclosure incompatible with their jurisdiction laws,” opined Singh.