An intricate issue

As the banking sector battles mounting bad loans, Parliament on Tuesday passed the Insolvency and Bankruptcy Code (Amendment) Bill that effectively shut doors on the promoters in the resolution process of a company that they founded or ran, but defaulted on repayments.

With bad loans in PSU banks reaching an unprecedented level of Rs 7.34 lakh crore as of September, Centre’s move to tighten screws around the failed promoters and borrowers is a welcome measure. By enacting the Insolvency and Bankruptcy Code (IBC) Law in 2016, the government tried to put in place a time-bound mechanism for resolving non-performing assets (NPAs) or bad loans in companies, and provide an exit route for all stakeholders.

The idea behind the new legislation was to see that no stakeholder would lose out. Therefore, promoters were also allowed to take part in the bidding process of their own company during the resolution process. That provision, it was believed, paved way for the backdoor entry of the promoters into the company after banks took a haircut on the loans. Consequently, the government brought out an ordinance in November to check such misuse.

Through the Amendment Bill, the government has converted the Ordinance into a legislation under which wilful defaulters and promoters of a company which has bad loans for over a year will be barred from taking part in the resolution process. Besides, such persons will not be able to purchase any property of the defaulting firm. Some feel the new provisions are in right direction.

However, there is a contrarian view as well. Some experts feel the new legal framework is too harsh on the promoters who defaulted on repayments for one reason or other. For instance, most of infrastructure companies landed in soup as there was inordinate delay in land acquisitions.

Added to it, policy paralysis during the Congress-led UPA’s second term compounded woes of several companies. Global recession of 2008 took a heavy toll on a large number of companies, from infrastructure to steel. Blaming promoters for such external factors is not a good precedent in a country which is going into overdrive in attracting new investments and encouraging startups, the contend.

What we need to keep in mind is that nobody can decipher and assess a company, its strengthens and weaknesses better than its promoters. Also, it’s an undeniable truth that no promoter or promoters will set up a company and invest their hard-earned money in it with an ulterior motive of cheating lenders.

There may be some with such intentions. But their number is miniscule. Equating all the financially-strained promoters with same brush will be detrimental to the idea of entrepreneurship without which no country can survive in the times to come.

It’s better for the country and the people here if the central government keeps this in view while building the legal architecture for effectively dealing with the companies that borrowed heavily from banks and are now facing numerous hurdles in business. An efficient and deft handling of the contentious issue will encourage the spirit of entrepreneurship while inefficient measures will have a debilitating impact on the country’s economic growth.