While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%.
Top officials of the finance and corporate affairs ministry and regulator IBBI are working out the next set of amendments to the insolvency and bankruptcy code (IBC) with a view to bolstering the resolution of toxic assets and plugging any loopholes in the system.
Secretaries in the ministry and other senior officials held two important meetings on September 21 and September 28 to explore the “next frontier” of the five-year-old IBC, official sources told FE.
The hectic parleys followed a directive by finance and corporate affairs minister Nirmala Sitharaman to the officials at a meeting of the Financial Stability and Development Council (FSDC) last month to finalise details of the changes that would be required to further strengthen the IBC regime, one of the sources said. The Reserve Bank of India and stock market regulator Sebi, too, wanted certain IBC issues to be settled fast.
The move comes weeks after the parliamentary standing committee on finance cautioned that the IBC may have strayed from its original objectives, thanks to inordinate delay in resolution and large haircuts for lenders.
While the average recovery from toxic assets was to the tune of 39% of creditors’ claims until March 2021, in some cases, the haircuts were as high as 95%. This asymmetry has to be reduced, critics say.
Of course, the recovery through the IBC is still way above that through other extant mechanisms, including Lok Adalats, DRTs and Sarfaesi Act.
To realise the original goals of the IBC, Jayant Sinha, chairman of the parliamentary standing committee on finance, has suggested that rules and regulations be streamlined, possibly though another amendment to the IBC, and the NCLT (National Company Law Tribunal) apparatus be bolstered.
The most crucial reasons for the delay in resolution and asset value erosion are the bottlenecks in the NCLT system, Sinha had told FE in August. As many as 13,170 insolvency cases involving claims of Rs 9.2 lakh crore are awaiting resolution before the NCLT. About 71% of the cases have been pending beyond 180 days.
The House panel had also flagged risks of procedural uncertainties from unsolicited and late bids. Analysts say often late bids are submitted by either ineligible promoters or their proxies to delay the resolution process. The panel also suggested that a professional code of conduct be firmed up for the powerful committee of creditors, which decides on all important matters in a resolution process.
To fix these issues, the Insolvency and Bankruptcy Board of India (IBBI) has now stipulated that bidders be allowed to modify the resolution plans only once. Similarly, it says CoC members will have to comply with a code of conduct, aimed at preserving the integrity of the resolution process. They will also come under the regulatory purview of the IBBI (and not sectoral watchdogs like RBI), which will initiate action if they don’t abide by the code, to be implemented soon.
The regulator’s action came after few cases in recent months tested the spirit of the IBC. For instance, in the case of Siva Industries Holding, the lenders accepted a one-time settlement by its former promoter, who had offered just 6.5% of the total debt, and filed a withdrawal application before the NCLT. In the case of Videocon, the NCLT had highlighted that the lenders were taking an almost 96% haircut and exclaimed that Twin Star Technologies’ offer was very close to the stressed firm’s liquidation value, which was meant to be confidential.