India Considers Whether Delinquent Owners Can Repurchase Assets

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  • India sets up panel to review 11-month old bankruptcy law
  • Business owners say barring them to bid for assets unfair

India has set up a panel to review provisions of the 11-month old bankruptcy law including whether to bar defaulting founders from repurchasing assets.

The committee set up to improve The Insolvency and Bankruptcy Code will have 14 members and includes officials from the finance ministry, Reserve Bank of India and representatives from industry and accountants group, Corporate Affairs Minister P.P. Chaudhary said in an interview on Monday. The code in force since December 2016 aims to accelerate winding up process of loss-making companies or recovering dues.

“The government will ensure justice to stakeholders,” Chaudhary, junior minister for corporate affairs, said over phone from Gujarat where he is campaigning for the ruling Bharatiya Janata Party. “The implementation of the law has to be reasonable, justified and not opposed to public policy.”

Fifty of India’s biggest defaulters are facing insolvency proceedings and may be sold off by court-appointed professionals, in a process where banks may have take losses on their loans. Under the existing rules, founders could then repurchase the assets cheaply leading to calls to bar them from the bidding process. Some owners have written to the government citing adverse business cycle as the reason for their inability to repay loans and said it will be unfair to ban them.

Read here Why India Is Pumping $32 Billion Into State Banks: QuickTake Q&A

Uday Kotak, managing director of Kotak Mahindra Bank Ltd., said some safeguards are needed to protect the interest of lenders, and to ensure that unscrupulous founders are kept out of the process. Banks are likely to face losses of as much as 60 percent on their loans for companies headed for bankruptcy courts, according to Kotak.

"One of the safeguards in place could be -- if there is a promoter bid -- that there should be a forensic audit done to check the track record of the founder, and whether the promoter has been translated as a willful defaulter or not,” Kotak, who is also Asia’s richest banker, said in an interview.

Steel manufacturers, power and construction companies dominate a list of 12 borrowers that Indian banks have been ordered to refer to the nation’s insolvency courts over bad loans totaling about $31 billion.

The insolvency and bankruptcy law put in place by Prime Minister Narendra Modi’s government shifts the balance in favor of the creditor, creating greater accountability for the family owners of India’s major companies, Kotak said.

For Kotak’s view on India’s bankruptcy process, click here

Funds controlled by Kotak Mahindra are looking at deals involving the assets and debts of some of the first 12 companies going through the bankruptcy courts, Kotak said. Industries including steel are of particular interest, according to the banker. Pricing of assets put up for sale should become clearer by the end of the first quarter, he said.

Soured loans have contributed to a $191 billion pile of zombie debt that’s cast the future of some lenders in doubt and curbed investment by businesses, prompting government to pump fresh capital into the state banks. Among the reasons for the surge in bad loans: a slump in commodity prices, a lack of appropriate legislation and regulation and a rapid buildup of excess capacity in industries such as telecom and cement. Four industries account for nearly 80 percent of stressed assets: power, steel, textiles and engineering and construction.

— With assistance by Anto Antony

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