IBBI Proposes Stricter Bidder Disclosures to Prevent Promoter Misuse in Insolvency

The Insolvency and Bankruptcy Board of India (IBBI) has put forward a proposal for a more rigorous disclosure regime for entities bidding to acquire distressed companies through the Corporate Insolvency Resolution Process (CIRP). The primary objective is to thwart attempts by former promoters to use the insolvency mechanism to reduce their debt burden and subsequently re-acquire company assets. Under the proposed rules, prospective resolution applicants (PRAs) will be mandated to provide a detailed statement of beneficial ownership. This statement must include information about all natural persons who ultimately own or control the PRA, along with the shareholding structure and jurisdiction of any intermediate entities. This move is a response to concerns that many assets entering insolvency resolution have ended up back in the hands of delinquent promoters who concealed their identities. Additionally, bidders must submit an affidavit disclosing their eligibility for benefits under Section 32A of the Insolvency and Bankruptcy Code (IBC), which provides immunity to new buyers from prosecution for pre-CIRP offenses. While Section 29A of the IBC already prohibits certain individuals from bidding, the new disclosure requirements aim to strengthen the process by making it difficult for former promoters to submit indirect bids and evade their liabilities. However, some experts suggest that these stringent disclosure requirements might discourage certain foreign entities that operate under strict confidentiality agreements from participating in the CIRP.

Impact: This initiative aims to enhance transparency and fairness in the insolvency resolution process. By preventing the re-acquisition of assets by potentially delinquent promoters and ensuring clearer ownership structures, it can improve creditor recoveries and bolster investor confidence in the IBC framework. Rating: 6