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  1. Stripping promoters of power in NCLT is good; here are reasons why

Stripping promoters of power in NCLT is good; here are reasons why

Given the Insolvency and Bankruptcy Code (IBC) is still in its infancy and Resolution Professionals (RP) are just beginning to work on solutions to revive near-bankrupt companies.

By: | Published: October 30, 2017 6:58 AM
Given the Insolvency and Bankruptcy Code (IBC) is still in its infancy and Resolution Professionals (RP) are just beginning to work on solutions to revive near-bankrupt companies. (Image: Reuters)

Given the Insolvency and Bankruptcy Code (IBC) is still in its infancy and Resolution Professionals (RP) are just beginning to work on solutions to revive near-bankrupt companies, it is not surprising that there is some degree of confusion on the rules, especially when it comes to the role of equity shareholders. Going by the clarification put out by the ministry of corporate affairs (MCA), it is clear equity shareholders won’t have a say when it comes to approving a resolution plan; the MCA says that once a resolution plan is firmed up under the IBC and approved by the creditors, shareholders need not be asked for their consent. To be sure, the IBC had made this evident; Section 30 of the Code says it is the committee of creditors that must approve the resolution plan, presented to it by the RP, by a vote of not less than 75%.

In other words, the creditors are supreme, and there is no mention of equity shareholders. There are those who argue shareholders should be asked for their views, via a special resolution, in the event there is a part or full write-down of the capital, for instance, or if a big part of the company is being sold off. However, even if the Companies Act did allow them some privileges, they must now give these up and let the financial creditors decide what’s best. This might appear harsh, but there is no room for soft options. Given how promoters could resort to delaying tactics to stall a resolution plan, since many of them are unhappy their companies have been dragged to the NCLT in the first place, it is just as well that they be out of the picture.

The fact that very few cases have been sorted out under the DRT and Sarfaesi in all these decades is evidence of the lengths to which promoters will go to ensure they don’t lose out. Indeed, the fact that the failure rate in the Corporate Debt Restructuring (CDR) cell is as high as 50% in terms of value and even higher in terms of numbers, is proof of how little promoters work to revive a company. That’s despite the fact that the CDR process allowed companies a host of concessions. In all these years, it is the banks and other financial lenders that have taken the biggest haircuts while most promoters have lost little in terms of their personal wealth.

As such, it is only fair that creditors now have the last word. As for minority shareholders, they too have been known to be capable of creating hiccups. Since it is critical there are no delays, it is best they too are out of the picture. It must be understood and appreciated the reason the Reserve Bank India has asked banks to refer cases to the National Company Law Tribunal (NCLT) is that it wants a speedy solution to be found and implemented. The amount involved in the first 12 accounts is Rs 2.4 lakh crore, and all of it is taxpayer money, not to be trifled with. As such, the less the interference in the process of recovering the money, the better.

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