Despite relaxed norms, few MSME promoters able to bid for their own company

Even after the government relaxed the norms for the micro, small and medium enterprise (MSME) promoters to bid for their own firms under the Insolvency and Bankruptcy Code (IBC), only a few have been able to bid successfully for their companies. 

A number of companies, closed for three to nine years, are under liquidation process at the National Company Law Tribunal (NCLT). With the assets almost turning into scrap, bankers are getting 15-25 per cent of the principal value, which they say is better than what resolution plans of the existing promoters offer. 

Even for the firms that defaulted on their payments recently and went to the NCLT, the resolution plan was not viable enough for bankers. 

In June, in view of large number of liquidations of MSMEs, the government had relaxed Section 29 A of the IBC, allowing promoters to take part in biddings. Data from the Insolvency and Bankruptcy Board of India (IBBI) till mid-December shows about 288 companies saw liquidation, while another 297 went for voluntary liquidation. 

Till June 30, the number of firms under liquidation was about 137. Hence, even after the relaxation, between July and December, about 145 more companies saw liquidation. Resolution was reached in 34 cases under CIRP, which stood at around 75 by mid-December. Hence, the number of firms going for liquidation remains higher than those with a resolution plan, despite relaxation.

"All the cases of liquidation are of old companies lying idle for 3-9 years. From firms that are shut for long, bankers are getting close to 15-25 per cent of principle value, as the machinery has become scrap," said Kamlesh Sighania, a Kolkata-based resolution professional.   

"In case of some MSMEs, if we are getting resolution plan by promoters with more than 80-90 per cent haircut, it is not viable for a bank. Instead liquidation is a better option. We are at 15-20 per cent value from land instead," said a banker at a public sector bank. 

"Often banks are wary of inducting same promoters, who had once defaulted for bidding under the resolution. In many cases, several of them have turned into willful defaulter amid the resolution process," Mohit Chawla, a resolution professional said.

If the promoter of an MSME is labelled as a willful defaulter, she or he is not eligible to bid.

According to Mamta Binani, another resolution professional, the number of liquidations are high as many of the companies where liquidation has been announced in the recent past, have been under Board of Industrial and Financial Reconstruction for long. 

Notably, apart from 282 firms under liquidation, another 297 have gone for voluntary liquidation. "In case of small companies, banks are generally open to the idea of resolution by the promoters. However, we have not come across many promoters of such companies coming for biding," said Ashok Kumar Pradhan, MD and CEO of United Bank of India.