Govt to enact IBC amendment to protect buyers of stressed firms

Modi govt's IBC 2019
The IBC Code was introduced to address the NPA crisis by speeding up resolution of insolvent companies.

The Narendra Modi government on Wednesday took an important step to protect the successful bidders of stressed assets from criminal proceedings against wrongdoings committed by the previous management or promoters. The Union Cabinet approved the Insolvency and Bankruptcy Code (Second Amendment) Bill, 2019 that looks to remove certain irritants in the insolvency resolution process to improve the ease doing of business, the government said in a press release.

The Insolvency and Bankruptcy Code was introduced in 2016 to address the issue of non-performing assets, or bad loans of banks, by speeding up resolution of insolvent companies. The amendment has been brought in to avoid closure of viable businesses of insolvent firms.

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Apart from ringfencing the successful bidders of bankrupt companies, the amendments will remove bottlenecks, streamline the corporate insolvency resolution process and protect last mile funding to make the financially distressed sectors attractive for investors. It will also bring in additional thresholds for financial creditors to prevent frivolous cases of corporate insolvency. The amendments will also ensure that the debtor’s business remains viable by clarifying that its licences and clearances cannot be suspended or terminated during the moratorium period.

The government has been trying to bring in a globally accepted cross-border insolvency framework that will make India attractive to foreign investors. The government had notified Section 227 of IBC last month to address the problems in financial service providers with over ₹500 crore assets. The Reserve Bank of India had approved bankruptcy proceedings against Dewan Housing Finance, in first such action against a financial services firm.

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The proposed amendments may address some design flows in IBC that lead to value destruction. The overwhelming powers of financial creditors in the resolution process is one such flow that could lead to the decimation of a running concern as their interest is just the recovery of their dues.

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