Leased petroleum assets under IBC to be exempt from moratorium: MCA

New rule aimed at ensuring national petro assets don't lie idle; petroleum ministry can repossess such assets such as oil wells and give them to another party

Petroleum assets leased out by a company undergoing insolvency proceedings would be exempt from moratorium under the insolvency and bankruptcy code, according to a latest notification by MCA. The new rule aims to ensure national assets in the petroleum sector don't lie idle, a senior official said.

This would effectively empower the petroleum ministry to repossess such assets such as the oil wells, and give them to another party.

Supporting the government move, a Petroleum and Natural Gas Ministry official said, “We are working to expand India's oil production at a fast clip at a time when global supplies continue to be stressed by geopolitics . At such a juncture, it isn't prudent to have oil wells fall inactive if any company goes into insolvency.”

Videocon Oil Ventures Ltd, the oil and gas exploration company of Videocon, is one such firm that went into insolvency in 2019. The corporate insolvency proceedings kicked off the moratorium on its oil basins.

“Very few companies In India are engaged in the production and exploration of oil and gas. Most of these are large players, run by government entities and have access to significant financing. As a result, the latest government direction would have limited impact on the ground...,” said Prashanth Vasisht, Senior Vice President and Co-Group head, Corporate Ratings at Icra.

Unlike other large markets such as the United States, India has very few small independent players.

Chances of a firm in the sector going into insolvency also remain slim as compared to many other sectors, owing to the sheer number of technical assessments such as geological surveys made before funds are raised, analysts said.

The Centre is currently gearing up to offer 26 oil blocks in the 9th Open Acreage Licensing Policy (OALP) round, bidding for which is expected to open in July.

On the flip side, however, in case a company does go into insolvency, the latest government notification may impact its chances of securing bids from prospective buyers. Vasisht explains, “The valuation of an oil company engaged in exploration and production depends heavily on the reserves they command. Taking those assets out of the equation, would leave little real space for valuation.”

The MCA notification dated June 14 says that the provisions of moratorium under section 14 of the IBC would not be applicable where a corporate debtor has any production or revenue sharing contract, Exploration Licenses and Mining Leases made under the Oilfields-Regulation and Development Act, 1948.

It further adds that, “any transactions, arrangements or agreements, including joint operating agreement, connected or ancillary to the transactions, arrangements or agreements” referred to above would also be exempt from moratorium.

While the provisions would not be applicable to Videocon Oil, which is yet to conclude its insolvency proceedings, the government wants to secure its position for any future insolvencies.

“This has been done keeping in view the importance of the oil sector from the economic point of view, bringing it par to the status of essential commodities. This will facilitate the continuation of such projects without any hindrance taking into account the requirement of petroleum and oil in the day-to-day operations across various economic activities,” said Sudhir Chandi- Director, Resurgent India.

Section 14 of the insolvency and bankruptcy code declares a moratorium for prohibiting any institution of suits or continuation of pending suits or proceedings against the company, transferring, encumbering, alienating or disposing of any of the assets of the company among other things. The moratorium becomes effective from the time the date of commencement of insolvency.