Stress resolution in India; experts discuss the way ahead

“The other thing is we have had many one-time restructuring (OTR). So, RBI came out with a scheme called one-time restructuring scheme in August last year, and we had two large companies going in for that scheme and with them, roughly 20 to 25 of companies each in the group actually went for this kind of restructuring. So firstly, the pandemic is not yet over and hence there is no certainty of revival. If there was certainty of revival, we will see more filings in IBC. Because IBC has been an effective way of recoveries and resolutions. The other thing is that because of the one-time settlement, people have gone for it.”

The parliamentary standing committee on finance has raised the red flag on the Insolvency and Bankruptcy Code. It goes on to say that the IBC has digressed from its original basic design. It is worried about what it claims a disproportionately high haircuts that are being taken. The panel has recommended that it be imperative to have a benchmark for a quantum of haircut, which is comparable to global standards.

Cyril Shroff, Managing Partner at Cyril Amarchand Mangaldas, said, “The Standing Committee has been scaling and it has called out a number of critical issues. I feel that the suggestions in the report, and also the general conversation actually don't go far enough. I think we are setting on an opportunity for a much bigger change, almost like an IBC 3.0. I think we should be very careful about either making cosmetic changes or being too prescriptive of what should be the lower level, I don't think you can really legislate all that.”

He added, “I think there is an opportunity now to go into the deeper causes of why IBC as it stands today, is essentially a failure. The rose coloured kind of glasses of the initial successes, they are finally off. Nobody in the world believes that it is working now. So, this is this is an opportunity for almost a reinvention of IBC.”

Talking about failure, Shroff said, “I think the design was good for some of the initial cases and it worked well for the initial dozen or so cases. I think the biggest thing it has done is that it has dramatically reduced the market for corporate control and one of the biggest contributors to that have been 29A. Why do you have a 95 percent haircut, because there are no buyers? That's one problem.”

“The second problem has been the institutional failure of the NCLT system and I think the Standing Committee goes into chapter and verse on that as well. When you have half the, you know, bench strength missing, and no time for a hearing, how do you expect this to work? So that's another reason for for the problem.”

“I think the third critical issue is the unresolved and almost schizophrenic conflict between value maximisation and, and process sanctity. I think that we need to find an innovative solution to that.”

Amit Agarwal, Sr Exec VP - Stressed Assets at Edelweiss, said, “I might be a little minority in this case, but I do think that IBC has done a great job. The offshored capital, first of all looks very clearly on a contract enforcement mechanism.”

“We definitely feel that wherever there is a contract, the sanctity has to be met, if somebody is a secured lender, he should get money before the unsecured lender and so on and so forth. I think IBC gave a lot of semblance, brought a lot of clarity, because the buyers or the capital the offshore capital that is coming in is off couple of varieties.”