Speaking to FE, sources in the Planning Commission said, the Plan document recognised weak creditors rights as the major factor for the malfunctioning of the credit market in India.
It noted that sometimes firms defaulted on payments to some holders while making payments to other. At times, there were delays in payment which were not announced. The Plan has emphasised the need to establish a sound market infrastructure for ensuring that all bond holders were treated on equal footing and delay in payment of even one day was publicly announced as a default.
The National Securities Depository Ltd (NSDL) could be utilised as conduit through which interest and principle payments are routed from the firm to the bond investors.
The Plan suggested that creditors should be allowed to take action when defaults take place. In case of defaults, the shareholders and management team should pass on control of the firm to bondholders who should make decisions on how best to extract value from assets.
Creditors should also be empowered to take possession of collateral in case of a default. All this would require an abandonment of the Board for Industrial and Financial Reconstruction and the Sick Industrial Companies Act.
The Plan observed that it was crucial to have an active market for distressed debt and mechanism for securitisation. Currently, it was inhibited by tax, legal and regulatory impediments it said. To make credit markets function smoothly, it was important to allow bond holders to sell-off distressed bonds to specialist firms, it said.