More accountability across the chain would further strengthen the most effective insolvency law India has had so far
Although the Insolvency and Bankruptcy Code (IBC) has done a great deal to chasten promoters and to help lenders recover their dues, it is probably true that expectations have been belied. There is little point in benchmarking the success ratios from the corporate insolvency resolution process (CIRP) to those achieved by processes in earlier regimes—SICA, DRT, SARFAESI and so on—because those systems were, to put it simply, terrible.
The IBC was supposed to have been the panacea for all evils, the ultimate cure. However, in an environment in which promoters have ruled the roost forever, crony capitalism has been rampant, bankers have been reckless and mindless, and corruption has seeped through virtually every layer of the financial system, it was somewhat ambitious to believe a new Code would set everything right. Our promoters have shown us there is nothing more they love than a good fight; they can dig in their heels and conjure up large sums of money at the last minute.
Essar Steel might never have been sold to Arcelor Mittal had it not been for the timely intervention by the corporate affairs ministry, under the watch of then finance minister Arun Jaitley, who amended the law to ensure wilful defaulters couldn’t get their businesses back. But, the day Arcelor Mittal finally won control of Essar Steel, we had found the right way to deal with insolvency.
To be sure, the Code has its share of weaknesses, but as we amend the rules, let us also affix more accountability to all the persons involved in the process. Among the bigger problems that have been pin-pointed are the interminable delays, the high levels of haircuts, and opacity with respect to the liquidation process and over-empowered liquidators. Eyebrows have also been raised about the conduct of the Committee of Creditors (CoC), essentially the bankers.
Corporate affairs secretary Rajesh Verma said last Friday vacant positions on the benches of the NCLT and the NCLAT were being filled. That has been overdue, but timelines for resolution also need to be shortened—90 days at best—with some grace period for exigencies. The judges need to be a lot less lenient and must disallow unnecessary interruptions and frivolous litigation, too much of which has come from incumbent promoters.
The steep haircuts have been reason for much heartburn. With some exceptions, these have been appallingly high. In the case of Alok Industries, for instance, banks recovered only `5,000 crore against claims of close to `30,000 crore. But, it is also true that bankers lent disproportionately large sums without properly evaluating the business and the recoveries thus might appear small compared with the dues. Ultimately, the value of the asset must be determined by the demand for it. We need to eliminate any room for collusion between lenders and potential buyers and, therefore, a code of conduct for the CoC needs to be framed. Without casting any aspersions and blaming the banks for the high level of haircuts, it must be said that lenders have tended to act arbitrarily.
Their handling of Siva Industries, for instance, left a lot to be desired. From a one-time settlement (OTS) for a paltry sum of about a tenth of the dues of `4,864 crore to withdrawing bankruptcy proceedings and wanting to hand the business back to the promoters, with full control, for a very nominal amount, their conduct was inexplicable. In a terse observation, the Chennai bench of the NCLT said it would go by its “judicial wisdom” rather than approve the “commercial wisdom” of the CoC.
Indeed, approving a plan that fetches them `328 crore as a settlement would attract criticism. NCLT Chennai ordered the company be liquidated. Again, the Mumbai NCLT bench had pointed out how intriguingly close the winning bid—put in by Anil Agarwal’s Twin Star Technologies—for Videocon Industries was to that of the liquidation value. The bench observed in its order that “surprisingly, the resolution applicant also valued all the assets and liabilities of all the 13 companies and arrived at almost the same value as the registered valuers.”
The OTS mechanism certainly needs a re-look. The idea was to give all parties a better shot at resolving case, and preserve capital, but the Siva episode tells us the provision could be vulnerable to misuse. However, it would be naïve to think all lending transactions will be bona fide and that promoters will, overnight, stop siphoning out funds from the business; corporate governance standards in India have a long way to go. However, to ensure that banks don’t take a big haircut, there could be a threshold amount specified for an OTS.
For instance, banks must get upfront, say, minimum 25% of the amount agreed to, and the rest could come in instalments. Section 12A of the Code which allows an insolvency application to be withdrawn if 90% of the CoC votes for it should not be removed. It is an exit option for the lenders, who may realise after a point that the CIRP isn’t such a bad idea altogether. As long as there are no mala fide intentions, lenders do deserve the flexibility to opt out of the insolvency process. There is also concern the liquidation process is not transparent enough with experts calling for more oversight.
The Insolvency and Bankruptcy Board of India wants the Stakeholders’ Consultation Committee to be more empowered when it comes to appointing professionals and fixing reserve prices for auctions. It wants liquidators to be more accountable. In fact, a little more accountability across the chain would strengthen the Code.