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  1. IBC ordinance, Uday Kotak panel recommendations are constraints on business; all promoters are not evil

IBC ordinance, Uday Kotak panel recommendations are constraints on business; all promoters are not evil

Promoters, supposedly the founders and creators of corporations and wealth for other stakeholders, can't always be termed as destroyers of the wealth they create, even when their corporations or businesses become NPAs.

By: | Published: December 16, 2017 2:42 AM
Uday Kotak, IBC ordinance, NPAs Promoters, supposedly the founders and creators of corporations and wealth for other stakeholders, can’t always be termed as destroyers of the wealth they create, even when their corporations or businesses become NPAs. (Image: Reuters)

Promoters, supposedly the founders and creators of corporations and wealth for other stakeholders, can’t always be termed as destroyers of the wealth they create, even when their corporations or businesses become NPAs. Some recent legislations and proposals on promoters, however, seem to suggest that there are no credible ones in India. That would be the only explanation for several legislations being made to blame promoters (including, by default, genuine ones) for the failing fortunes of businesses they run—even when the failure results from genuine business reasons. The immediate point of reference that lends credence to this assertion is the Insolvency and Bankruptcy Code (IBC) ordinance which debars promoters from bidding for their businesses during a resolution plan. One of the objectives stated in the ordinance is to prohibit certain persons from submitting a resolution plan who, on account of their antecedents, may adversely impact the credibility of the processes under the IBC. This includes promoters, too. While the intention is noble, the fine print of the ordinance suggests that the outcome may sometimes be not.

The controversial provision, Section 29A, not only debars promoters of the borrowing company, but also the promoters of the other resolution applicants as listed in this provision. The ordinance fails to make a distinction between an innocent promoter and an errant or fraudulent promoter. To be sure, some grounds of disqualification seem genuine. For instance, to disqualify a person who is an undischarged insolvent, or a wilful defaulter, or is convicted of offences with imprisonment of two or more years, or who indulges in preferential transactions or undervalued transactions or even fraudulent transactions, seems logical. This is because this is not the first time such people have been debarred under law. Many other legislations, including the Companies Act, 2013, and Sebi regulations, already debar persons under such disqualification criteria under specific provisions. But, some other grounds in the ordinance seem to be an overreach.

These include disqualifying persons whose accounts are classified as a non-performing asset or who is debarred by Sebi from trading in securities and accessing capital markets. These disqualifications ignore the important “business judgement” rule which allows for errors of judgement in conducting business that cause losses to the business, provided the people in the management act honestly in the interest of the business. Further, being debarred by Sebi for a violation on securities law does not look to be a solid enough ground to debar someone under the law for insolvency and bankruptcy. Therefore, the basic presumption is that all promoters are unscrupulous. This is not good, and needs to change. Not just the ordinance, even the Companies Act, 2013, which introduced a new definition of promoter primarily to fix responsibilities and obligations on them, assumes they will only commit wrong.  In addition, for listed companies, the Sebi regulations cast numerous obligations on promoters, including freezing of promoter/promoter group holding of securities held by them in events of default.

Even the Uday Kotak committee on corporate governance equates promoter-led companies to fiefdoms with a raja (monarch) style of running—i.e., self-interest of the promoter (raja) precedes the interests of praja (the other stakeholders)—without allowing for a case-to-case basis of deciding as to when a promoter-led company can be said to exist solely for the self-interest of promoters. This assumes every promoter-led company is modelled in a raja-style of functioning. Keeping this as the basis, the Kotak committee recommended suggestions which can adversely impact the promoters. So, whether it was the uproar created by proxy advisory firms and mutual funds over the non-compete fee being paid to the promoter of Max Life in the HDFC Life-Max Life merger, prompting Sebi to investigate the matter further, or anything else to do with promoters, the general sentiment is that everything is wrong if the promoter is in any way, shape or form related to any arrangement along those lines.

This is where the change is needed. While it is good to have laws defining limits and restrictions on promoters to protect minority shareholders’ and creditors’ interests, an overreach through laws that tighten the noose around promoters is unwarranted. This will only impede business operation and discourage entrepreneurship. The IBC ordinance, the Uday Kotak committee recommendations, and numerous judgments can be seen to be constraints on business and run completely contrary to the accepted international norm of how not to rein in corporate growth. It seems that both the legislature and the judiciary are bafflingly consistent when it comes to shackling promoters and initiative in the corporate domain. It is high time that the right balance is struck to ease the way forward for ethical and innovative business practices, especially when it comes to promoters.

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