Subhash Chandra’s IBC deal: ED probe focuses on big haircuts, proxy bidders

Why in the News

The insolvency law was meant to take failed companies away from their promoters, but investigators allege promoters are using the process itself to buy back their companies at deep discounts. The Enforcement Directorate (ED) has made such frauds its first operational priority, after Zee founder Subhash Chandra settled bank claims of over ₹22,000 crore for ₹6.5 crore.

How is the insolvency process meant to work?

1. What it is: The Insolvency and Bankruptcy Code (IBC), 2016 gives creditors a time-bound process to rescue or sell a defaulting company. It works like a court-supervised auction of a failed business.
2. Who decides: In the Corporate Insolvency Resolution Process (CIRP), a resolution professional (RP) replaces management. A Committee of Creditors (CoC) approves a resolution plan by a 66% vote.
3. Haircut: A haircut is the share of admitted claims creditors give up under a plan. A 94% haircut returns ₹6 per ₹100 owed.
4. The takeaway: A process designed to end promoter control can become a cheap route back to it.

What has the ED flagged?

1. New priority: At an internal conference in Bengaluru, ED officers named “unearthing frauds under IBC and PMLA” the agency’s first operational thrust area. PMLA is the Prevention of Money-laundering Act, 2002.
2. Specific target: The ED will examine “collusive resolution cases involving disproportionately large haircuts through which promoters re-acquire assets”.
3. Earlier probes: Over two years, the ED has probed about a dozen cases alleging five forms of manipulation:
   • promoter-linked entities dominating creditor committees;
   • proxy bidders used to regain companies;
   • compromised resolution professionals;
   • assets moved out before or during the CIRP;
   • bids allegedly suppressed.

How do promoters allegedly regain control?

1. Alchemist: A group firm allegedly held 97% of CoC votes and the RP was a former group employee. The ED alleged the aim was immunity from past offences under Section 32A.
2. Tribunal finding: The National Company Law Tribunal (NCLT) held the Alchemist CIRP vitiated by “fraud and collusion”. The Calcutta High Court later ordered a Central Bureau of Investigation probe.
3. Sunstar Overseas: The company allegedly financed its own takeover through Umaiza Infracon LLP, a shell with no funds of its own, at an almost 85% haircut.
4. Richa Industries: Saariga Constructions, allegedly set up by promoters through a former employee acting as a benamidar (front holder), bought CoC votes. Banks took a haircut of about 94%.

How are assets allegedly stripped before or during insolvency?

1. Amtek Auto: Fifteen group companies with claims over ₹34,000 crore were resolved at an average haircut of about 81%.
2. Shell network: In Amtek, the ED identified about 500 shell companies allegedly holding properties bought with siphoned funds.
3. Undervalued sales: In Angle Infrastructure, two acres were allegedly sold for ₹31 crore against a valuation of ₹160 crore. The RP denied it.
4. Assets moved out: In Bhasin Infotech, 384 commercial units were allegedly shifted beyond the CIRP through “sham” and “backdated” agreements.

Challenges

1. Proxy loophole: Section 29A bars defaulting promoters from bidding, but benami fronts and shells evade it.
2. Immunity risk: Section 32A’s protection for approved plans can shield a collusive buyer if fraud surfaces late.
3. RP independence: Resolution professionals with links to promoters face weak checks before appointment.

Way Forward

1. Beneficial ownership checks: The Insolvency and Bankruptcy Board of India (IBBI) should require resolution applicants to disclose ultimate owners.
2. Haircut trigger: Mandate an independent forensic audit when a haircut crosses a set threshold.
3. RP vetting: The IBBI should screen RPs for prior links with the debtor group.
4. Agency coordination: Set an information-sharing protocol between the ED, the IBBI and the NCLT.

Conclusion

Deep haircuts now draw scrutiny as possible fraud, not only as the cost of failure. Whether the IBBI tightens checks on bidder ownership and RP independence will decide if promoters can still buy back what they lost.

Key numbers

1. Richa Industries recovery: ₹40.29 crore against admitted claims of ₹696 crore (October 2025).
2. Sunstar Overseas sale: ₹196 crore against admitted claims of ₹1,274.14 crore.

Back2Basics: Section 32A of the IBC

1. What it does: It ends a company’s liability for offences committed before the CIRP once the NCLT approves a resolution plan.
2. Asset protection: The company’s property cannot then be attached for those earlier offences.
3. Condition: The protection applies only where control passes to a new owner who is not a promoter, related party or abettor of the offence.
4. Origin: Inserted in 2020, it gives genuine buyers a clean start; offenders stay personally liable.

Matching Previous Year Question

“[2024] Consider the following statements: Statement-I: Syndicated lending spreads the risk of borrower default across multiple lenders. Statement-II: The syndicated loan can be a fixed amount/lump sum of funds, but cannot be a credit line. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II explains Statement-I (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I (c) Statement-I is correct, but Statement-II is incorrect* (d) Statement-I is incorrect, but Statement-II is correct ANSWER:”