Change in IBC rules in agenda for Banks as promoters exploiting loophole
Banks are urging changes to insolvency regulations to prevent promoters from manipulating their companies' size to qualify as MSMEs and retain control during bankruptcy proceedings. This move aims to address concerns about delinquent borrowers exploiting the system by downsizing assets and staff to benefit from special provisions for MSMEs.
Lenders have come across instances where delinquent borrowers have sharply written down the assets, shrunk their size and headcount, to masquerade as small or medium scale enterprises which are spared of one of the stringent conditions of the insolvency and bankruptcy code (IBC).
Under a special provision, a promoter of any medium, small and micro entity (MSME) is allowed to submit a revival plan for the company once it is admitted under the corporate insolvency and resolution process. Some promoters have scaled-down the asset size of defaulting companies so as to classify them as MSMEs, which in turn would enable them to retain their presence on the board, and thus have a say in the resolution process once lenders invoke the IBC.
In companies that are not registered as MSMEs, promoters are barred under Section 29A of the insolvency law to bid for it.
In perpetrating such a strategy, a company would register with Udyam, a government portal that certifies a company as an MSME, by filing a revised valuation, balance-sheet, staff strength and other information like the Aadhaar details of the directors on the government portal. It’s a quick and simple process once the relevant documents are uploaded.
The investment and turnover limits for a 'medium' enterprise is Rs. 50 crore and Rs. 20 crore while that for a 'small' enterprise is Rs. 10 crore and Rs. 50 crore respectively.
