Big boost for SMEs, Centre set to take this giant step

The central government is considering relaxing some rules for the convicted promoters, as well as for the micro, small and medium enterprises (MSMEs), to allow more bidders to participate in the resolution process under the Insolvency and Bankruptcy Code (IBC). The proposed changes are part of an ordinance the government is likely to promulgate soon. The union cabinet may consider next week the amendments proposed by a government panel in the current code, sources in the Ministry of Corporate Affairs said.

The ordinance to bring certain changes in the IBC may come up as early as Wednesday, said a senior official told DNA Money. The government is narrowing down on 29A clause related to the conviction of a promoter, who has been convicted six years prior to presenting a resolution plan to participate in bidding. "A person convicted within six years from the date of submitting a resolution plan will not be eligible to participate in the bidding. However, a promoter convicted before six years will be allowed to take part in the insolvency proceedings," sources said.

In a big relief to MSMEs, "Promoters whose account has been classified as non-performing asset (NPA) for last one year will be able to present a resolution plan. Such promoters were earlier eligible to participate only upon clearing all overdue payments. Also, a promoter who has provided a personal guarantee to the bank and has not been able to pay it will be allowed to participate in the resolution process for the MSME," sources said.

Terming it as positive for the success of IBC, Ramakant Rai, partner at Trilegal, said that such relaxations are aimed at increasing the pool of applicants. "This is good for the bidding process," he added.

The proposed ordinance is also likely to clear the air around the homebuyers' status. Homebuyers are likely to be granted the financial creditor's status placing them right after banks in the hierarchy under waterfall mechanism for liquidation. As of now, flat owners neither fall under the operational or financial creditor's category, as per the law.

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The ordinance is also likely to allow settlement of disputes outside the court if 75% lenders on the Committee of Creditors (CoC) are in agreement. Currently, 90% of the CoC members have to agree on it.

These suggestions are part of the Insolvency Law Committee report that has proposed several amendments to the IBC to address issues faced in the implementation of the law. The amendments, being implemented through the ordinance, will largely be based on the panel's recommendations. The panel submitted its report to the Ministry of Finance and Corporate Affairs one month back.

The government is also relaxing another provision related to section 29A of the IBC to allow financial institutions to participate in the resolution process, bringing them on par with banks, sources said. "Financial institutions such as Non-banking Financial Companies (NBFCs) and private equity firms just like banks convert debt of a firm into equity when it becomes unsustainable," said an official, explaining the rationale behind the move.

The government has decided to accept most of the recommendations of the panel except a few - regarding criteria for filing of a resolution application and fast track insolvency mechanism, sources said. The committee had recommended increasing the threshold limit for filing a resolution application from Rs 1 lakh to Rs 10 lakh to keep out any frivolous applicants. But this has not been allowed by the government. Similarly, fast track mechanism aimed at helping small firms with smooth exit is likely to stay. The committee was against continuing with it.

SMOOTHENING PROCESS

Stressed assets worth over Rs 4.12 lakh crore in NCLT  
A total of over Rs 9 lakh crore locked up in NPAs accumulated by banks  
12 accounts responsible for 25% of bad loans on bank balance sheets  
RBI has referred stressed companies to NCLT through two lists

For promoters

29A: A promoter if convicted six years before submitting resolution plan can bid  
29A: IBC to allow financial institutions to bid, bringing them on par with banks

Relief for MSMEs

MSME promoters with NPA of 1 year to be allowed to bid  
Promoters not able to pay personal guarantee can also bid for MSME assets

For homebuyersHomebuyers to get financial creditor status

By Anjul Tomar, DNA Money