It is hard to understand why the government would want to stray from the IBC process that has been working well, even if there have been some teething troubles.
The ministry of corporate affairs (MCA)’s latest suggestions on rescuing bankrupt businesses seem to be bypassing the IBC process. MCA secretary Injeti Srinivas says lenders and promoters could come up with a “pre-packaged” bankruptcy scheme and present it before the National Company Law Tribunal (NCLT). The idea ostensibly is to reduce or prevent litigation and speed up the process. If we have understood this correctly, there will be no role at all for the Resolution Professional (RP) who has been scrutinising the bids. Moreover, the MCA secretary’s comments suggest the promoters will stay in control and run the company while the revival scheme is being worked out.
It is hard to understand why the government would want to stray from the IBC process that has been working well, even if there have been some teething troubles. Srinivas himself has pointed out how IBC has catalysed recoveries to the tune of Rs 3 lakh crore since 2016, directly and indirectly. Admittedly, a good 56% of the 382 companies whose cases have been closed, were liquidated; only 13% of them found buyers, and that too at an average haircut of 45%. It is also true that in many instances, the deadlines have been missed. Some delay was inevitable given the IBC is a brand new piece of legislation and the courts—NCLT, NCLAT, high courts and the Supreme Court—needed time to rule on various aspects of it.
However, in some instances, the delays have allowed banks to recover substantial sums of money. For example, while the late Ruia bid for Essar Steel might might turn out to be ineligible, the fact is they have come up with an offer that is bigger than the one made by Arcelor Mittal. With a good number of cases having been heard and successfully concluded, the time taken to resolve the next lot of cases should be much less. As such, delays or litigation cannot be grounds for not sticking to the IBC process. The new process being recommended can hardly be a transparent one, especially when it is a collaborative effort by the banks and the promoters. At the end of the day, many of the promoters have defaulted—wilfully or otherwise—and that should automatically preclude any discussions with the banks.
In fact, even the current sealed-envelope method needs to be traded for an open auction bidding process to make it transparent. RBI’s February 12 circular makes it clear that stressed assets must be referred to the NCLT in a given time frame. This discipline that the central bank is trying to bring in should not be diluted. For the time being, it would not be wise to tinker with the IBC process except to strengthen it.