The government’s Pre-Packaged Insolvency Resolution Process (PPIRP) implemented in 2021 for resolving financial stress among MSMEs — where default amount ranges between Rs 10 lakh and Rs 1 crore – hasn’t seen significant adoption, according to the Reserve Bank of India (RBI). Addressing a conference on Thursday on the future road map for the resolution of stressed assets and IBC (Insolvency and Bankruptcy Code), governor Shaktikanta Das said the response towards the adoption of PPIRP “seems to be relatively muted.”
“One reason could be the hesitancy on the part of the financial creditors (FCs) in approving the proposals under this mechanism, wherein the haircut is perceived as voluntary,” said Das.
However, he stressed that PPIRP will incentivise the promoters to constructively engage with the creditors, possibly even before the occurrence of any default event.
“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, as and when the statutory enablers are in place. Thus, in their own interest, the creditors and debtors may consider adopting PPIRP in applicable scenarios based on prudentially realistic cost-benefit evaluations,” the governor explained.
“The discretionary nature of settlement terms makes PSU lenders reluctant to agree to terms which could later lead to personal questions against the officers involved. Promoters tend to hold-out, hoping for a revival or just in hopes of avoiding the embarrassment of a bankruptcy tag against their name. The result is that the process, which could be a game-changer for affecting turnarounds, has found few takers so far. Although PPIRP enables the promoter to be a part of the restructuring, with a reduced litigation risk, systemic changes are required before the process takes steam,” said Utkarsh Sinha, Managing Director, Bexley Advisors — a boutique investment bank firm — told FE Aspire.
Das further noted that PPIRP could be a “potential game changer” when it comes to out of court resolution framework, given the limitations involved.
“We are cognisant of the limitations of the out of court resolution framework, in particular the coordination issues since a large part of the creditor universe like mutual funds, insurance companies and other bond/debenture holders, etc. is outside the scope of our Prudential Framework for Resolution of Stressed Assets. Hence, we have a special interest in effectively dovetailing the out of court workouts conceived under our Prudential Framework with that of the IBC. The PPIRP could be a potential game changer in this regard,” said Das.
The PPIRP saw only six admitted cases, of which four were ongoing while one case was resolved and one was withdrawn, according to the data shared by Bhanu Pratap Singh Verma, Minister of State in the MSME Ministry in a written reply to a question in the Lok Sabha in August last year.
The pre-pack process can be initiated by an eligible MSME who has made the default and has not undergone or is not undergoing the insolvency process under Part II IBC. However, the debtor can file for insolvency resolution after approval of the name of the resolution professional by creditors.