Cabinet decisions: IBC to ring-fence successful bidders

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Published: December 12, 2019 6:17:12 AM

The move will help NBFCs tackle their temporary liquidity mismatch and also enable them to continue to lend funds and aid last-mile lending. Finance minister Nirmala Sitharaman had, in the Budget for 2019-20, announced that the government would provide one-time six-month partial credit guarantee to PSBs for the purchase of assets.

Cabinet, IBC, NBFC, Insolvency and Bankruptcy Code, economy news, Bhushan Power & Steel, BPSL, liquidity crunch , cash-flow mismatchAlthough the NCLAT subsequently asked the ED to release the attached properties it also put the Rs 19,700-crore payout by the JSW Steel for the debt-ridden company on hold until further orders.

The Cabinet on Wednesday cleared an amendment to the Insolvency and Bankruptcy Code to ring-fence successful bidders of stressed assets from criminal proceedings against offences committed by previous management/promoters. It also cleared a proposal to allow state-run banks to buy relatively lower-rated assets of financially-sound NBFCs, including housing finance companies, to ensure greater flow of funds to the stressed shadow banking sector.

According to the changes to the IBC approved by the Cabinet, a single home buyer can’t initiate insolvency proceedings against a real estate firm. The amendments to IBC are likely to be presented in the current session of Parliament for approval. The move to insulate stressed firms from the sins of earlier management will avoid a repeat of cases like Bhushan Power & Steel (BPSL). Recently, the Enforcement Directorate had seized a portion of BPSL’s assets in a money laundering case against its former promoters.

Although the NCLAT subsequently asked the ED to release the attached properties it also put the Rs 19,700-crore payout by the JSW Steel for the debt-ridden company on hold until further orders.

Under the partial credit guarantee scheme approved by the Cabinet, state-run banks would be able to purchase high-rated pooled assets from financially-sound NBFCs and HFCs “with the amount of overall guarantee being limited to first loss of up to 10% of fair value of assets being purchased by banks, or Rs 10,000 crore, whichever is lower”, according to an official statement.

The scheme would cover NBFCs and HFCs that might have slipped into “SMA-0” category during the one-year period prior to August 1, 2018, and asset pools rated “BBB+” or higher. Similarly, the window for one-time partial credit guarantee offered by the government would remain open till June 30, 2020, or till such date by which Rs 1 lakh crore worth of assets get purchased by banks, whichever is earlier. At the same time, the finance minister would have the power to extend the validity of the scheme by up to three months by taking into account its progress, the statement added.

The move will help NBFCs tackle their temporary liquidity mismatch and also enable them to continue to lend funds and aid last-mile lending. Finance minister Nirmala Sitharaman had, in the Budget for 2019-20, announced that the government would provide one-time six-month partial credit guarantee to PSBs for the purchase of assets.

As for insolvency proceedings against real estate players, although an official statement didn’t give details, as per an earlier proposal, the number of home-buyers required to file a case at NCLT must be at least 100 or they must collectively account for a minimum of 5% of the outstanding debt of the realty developer, whichever is lower.

At present, a home-buyer — just like any financial or operational creditor — can file an insolvency case against a realty developer if the default amount involved is Rs 1 lakh or more. The latest plan is aimed at preventing a few potentially unscrupulous elements within the home-buyer community from abusing the spirit of the IBC by unsettling real estate companies at the behest of or in connivance with rival firms. However, home-buyers will continue to be treated as financial creditors.

“Ensuring that the substratum of the business of corporate debtor is not lost, and it can continue as a going concern by clarifying that the licences, permits, concessions, clearances etc. cannot be terminated or suspended or not renewed during the moratorium period,” the government said in a statement after the Cabinet meeting.

Anshuman Magazine, chairman and chief executive (India, South East Asia, Middle East & Africa) at CBRE, said: “The move will play an important role in resolving the issues related to liquidity crunch and cash-flow mismatch issues, especially for financially solvent NBFCs. It will provide liquidity to such companies and also protect the economy from any spiral effect that may arise due to the failure of such companies.”

Commenting on the proposed changes to the IBC, Sapan Gupta, partner and national head (banking and finance) at Shardul Amarchand Mangaldas, said: “Approval by the Cabinet to provide immunity to successful bidders under IBC is a great boost. This is a positive and timely step and will increase confidence among prospective buyers of stressed assets.”

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