News reports suggest that the Government is considering amending Section 29A of the Insolvency and Bankruptcy Code, 2016, which was itself introduced by way of an amendment only a few months back. Section 29A specifies various categories of persons permitted to be resolution applicants, i.e. persons who are considered ineligible for submitting a ‘resolution plan’ for the settlement of the insolvency of a company. If the Economic Times is correct, clause (j) of Section 29A, which disqualifies even a person having a ‘connected person’ who is disqualified under clauses (a) to (i), may be considerably watered down.
The Government clearly seems to have been shaken (as it should be) by the comical manner in which Section 29A is being used to threaten ArcelorMittal-Nippon Steel and NuMetal, the two consortiums interested in taking over Essar Steel. The specter of 29A appears to have prompted ArcelorMittal to sell its stake in Uttam Galva, an account which is an NPA, at a huge discount to the price at which it was purchased. Persons who control an account which is declared an NPA are disqualified from submitting resolution plans as per Section 29A.
On the other hand, NuMetal, helmed by VTB Bank of Russia, is also 25% owned by a Singapore-based trust in which Rewant Ruia, one of the family members of the Ruias of Essar Steel is a beneficiary. They have signified that Ruia would give up his stake if need be.
If one or both of these heavyweights are held to be ineligible as per Section 29A, this would almost guarantee that Essar Steel’s lenders would have to take a bigger hit on their investments than they would have if NuMetal and ArcelorMittal-Nippon Steel had to grapple with each other to take over over Essar Steel’s valuable assets. And this is just one case. As the list of eligible resolution applicants gets pared by 29A’s breathtaking reach, lenders would have to brace themselves for trickling returns where there could conceivably have been a competition-induced flood.
If the goal of the Code is to maximise returns to creditors, thereby lowering the cost of capital in the economy, then 29A is at cross purposes to that goal. And it isn’t just clause (j). Clause (c), which bars anyone who has an account which is declared an NPA, or an account of a company which is under the management or control of such person, or of whom such person is a promoter is declared an NPA, ends up barring an extraordinarily large range of entities. Clause (d) disqualifies a person who has been convicted for an offence punishable with imprisonment for two years or more. As per Indian law, even defamation is punishable for two years.
The problem with a system that leads to creditors taking massive hits on their investments is that it makes loans expensive and shrinks the number of persons who get them to a select few in a select few sectors. The economy suffers in the long run. Section 29A doesn’t need an amendment. It needs deep surgery.
