The delay in completion of corporate insolvency resolution proceedings (CIRP) under the Insolvency and Bankruptcy Code (IBC) is a cause for concern, Reserve Bank of India (RBI) governor Shaktikanta Das said on Thursday, adding that 67% of ongoing cases have breached the 270-day deadline set for completion.
“The code envisages a time-bound process, requiring the completion of the CIRP within 180 days, with a one-time extension by up to 90 days in exceptional circumstances. The data published by the IBBI, however, raise certain serious concerns,” Das said.
According to the data, 67% of the ongoing CIRP cases as on September 30 have already crossed the total timeline of 270 days. More concerning is the fact that the average time taken for admission of a case during FY21 and FY22 stood at 468 days and 650 days, respectively. Das said such long delays will substantially erode the value of assets.
Overall, since the inception of IBC, a total of 7,058 corporate debtors have been admitted into the CIRP, of which 5,057 cases have been closed and 2,001 cases are under various stages of resolution. Creditors have realised Rs 3.16 trillion out of the admitted claims of Rs 9.92 trillion at a recovery rate of 32% as of September-end.
There are reasons behind the delay, including the evolving jurisprudence related to the IBC, litigatory tactics adopted by some corporates, lack of effective coordination among creditors and bottlenecks in the judicial infrastructure.
Accordingly, having a pre-packaged insolvency resolution process (PPIRP) can help reduce the delay, Das said. He said India has already rolled out PPRIP for micro, small and medium enterprises, but the response to it is relatively muted, probably because hesitancy on the part of financial creditors in approving the proposals under this mechanism, wherein the haircut is perceived as voluntary. However, Das stressed that the PPIRP will incentivise promoters to constructively engage with creditors, possibly even before occurrence of any default.
“This would facilitate swift and smoother resolutions, avoiding unnecessary adversarial litigations. Overall, this could be a win-win situation for both creditors and debtors. Once this perception is established, there could be a greater acceptance of this mechanism for larger corporate debtors as well,” Das said.
On several occasions, authorities have raised concerns regarding the conduct of the committee of creditors (CoC). These include lack of participation in CoC meetings, lack of engagement and effective coordination among creditors and disproportionate prioritisation of individual interest of certain creditors rather than their collective interest while designing resolution plans, Das said.
Given these shortcomings on the part of CoC, there appears to be a trend in recent years towards balancing the rights of operational creditors with those of financial creditors under the IBC. While the focus on ensuring equity among all stakeholders may be appreciated, Das said, there needs to be some distinction in weightage attributed to different category of creditors, depending upon the degree of risk absorbed. Fnancial creditors take the maximum risk and hence their risk needs to be compensated on priority, Das said.
The governor said a legal framework for large group insolvency must also be introduced. While there would be challenges like intermingling of assets, devising the definition of ‘group’ and addressing cross-border aspects, it would still be preferable to see the opportunity here and put in place a workable framework for group insolvency.
Lastly, developing a secondary market for stressed assets could also become an important mechanism for management of credit exposures by the lending institutions.