Govt To Explore Insolvency Route For Closure Of State-Owned Firms STC And PEC Limited

Govt To Explore Insolvency Route For Closure Of State-Owned Firms STC And PEC Limited

Introduction

The government has decided to explore the possibility of closing down two state-owned firms, State Trading Corporation of India Limited (STC) and PEC Limited, through the Insolvency and Bankruptcy Code (IBC) mechanism. This move marks the first instance of pursuing closure of central public sector enterprises (CPSEs) through this route.

Factual Background

STC and PEC Limited are categorized as non-performing assets (NPAs) with lenders, and the government has been exploring options for their closure. The decision to explore the IBC route was taken after discussions at the level of the Prime Minister's Office (PMO).

Procedural Background

The government is currently examining the possible options and challenges involved in closing down the two firms through the IBC mechanism. Discussions are being held among various ministries, including finance, commerce, and law, and a cabinet note on the matter is being prepared.

Issues Involved

1. Sovereign Guarantee: The closure of state-owned firms through the IBC route may impact the implied sovereign guarantee while extending credit to CPSEs.

2. Ratings Impact: The move may impact the ratings of government-owned firms in the short term and raise questions on government backing in these companies.

3. Precedent: The closure of state-owned firms through the IBC route may set a bad precedent and impact the lending strategies of banks.

Contentions of the Parties

Government's Contentions: The government is exploring the IBC route as an option for closure of STC and PEC Limited, citing the need to examine the possible options and challenges involved.

Bank's Contentions: A senior bank executive has expressed concerns that the closure of state-owned firms through the IBC route may set a bad precedent and impact their lending strategies to government-owned firms.

Reasoning & Analysis

The government's decision to explore the IBC route for closure of STC and PEC Limited marks a significant development in the insolvency landscape. The move may have far-reaching implications for the lending strategies of banks and the ratings of government-owned firms.

The IBC mechanism provides a framework for resolving insolvency and bankruptcy cases in a time-bound manner. However, the application of this mechanism to CPSEs raises several questions and challenges.

Final Outcome

The government is currently examining the possible options and challenges involved in closing down STC and PEC Limited through the IBC mechanism. A final decision on the matter is yet to be taken.

Implications

The move may have significant implications for the lending strategies of banks and the ratings of government-owned firms. It may also impact the implied sovereign guarantee while extending credit to CPSEs and raise questions on government backing in these companies.