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Srinath Sridharan

Independent markets commentator. Media columnist. Board member. Corporate & Startup Advisor / Mentor. CEO coach. Strategic counsel for 25 years, with leading corporates across diverse sectors including automobile, e-commerce, advertising, consumer and financial services. Works with leaders in enabling transformation of organisations which have complexities of rapid-scale-up, talent-culture conflict, generational-change of promoters / key leadership, M&A cultural issues, issues of business scale & size. Understands & ideates on intersection of BFSI, digital, ‘contextual-finance’, consumer, mobility, GEMZ (Gig Economy, Millennials, gen Z), ESG. Well-versed with contours of governance, board-level strategic expectations, regulations & nuances across BFSI & associated stakeholder value-chain, challenges of organisational redesign and related business, culture & communication imperatives.

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IBC - A W.I.P. Is Better Than R.I.P

Despite much criticism of the IBC, one has to accept that it has proved far more effective than any other way of recovering lender monies. The correct way to validate its effectiveness would be to compare the resolution value to the liquidation value and not the total loans

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The Insolvency and Bankruptcy Code (IBC) was launched in 2016, with the aim to overhaul the corporate distress resolution regime. It was to protect the interests of small investors and the financial system where public monies are involved.

When a default in repayment occurs, creditors gain control over the debtor’s assets and must take decisions to resolve insolvency. The IBC mooted completing the entire insolvency resolution within 180 days, with the possibility of extending the timeline, should creditors consent to it. For smaller companies, including startups with an annual turnover of Rs 1 crore, in case of insolvency, the whole exercise must be completed in 90 days, but the deadline can be extended by another 45 days. If debt resolution doesn't happen, the company goes for liquidation.

*Time, bench strength  & valuation concerns 

Till September 2022, financial creditors had recovered only about 33 per cent of their claims in 553 corporate insolvency processes that were resolved. It took an average of 560 days to resolve 143 cases in 2021-22, while it had taken 468 days to resolve 120 cases in 2020-21. Moreover, 64 per cent of the ongoing insolvency cases have spilled beyond 270 days.  While the RP might want to improve on valuations with additional time for resolution, any further delay might lead to erosion in the asset valuations, as well as exodus of human capital in the enterprise. There is also a perception and worry about the lack of transparency in many IBC cases. 

The bench strength and technical capabilities of experts and manpower at adjudicating institutions need building up of capacity, urgently. The balancing act of time-bound resolution and value maximisation of resolutions will need improvement. 

The Swiss challenge method in some of the IBC resolutions has discovered better valuation outcomes. Under this method, a bidder can make an unsolicited bid. Once approved, the RP will seek other bids and choose the best of the lot. It ensures value maximisation and maximum recovery for the creditors of the corporate debtor. It would also help if the lenders are allowed to restart the insolvency proceedings should a successful resolution applicant back off.

*Current proposal to upgrade IBC

The Union ministry of corporate affairs (MCA) has proposed sweeping changes to the IBC to leverage technology to enable transparency and speed to the corporate insolvency resolution process.  The MCA has proposed a new waterfall mechanism under which creditors will receive proceeds up to the stressed firm’s liquidation value, in the order of priority already stipulated. Any surplus over such a liquidation value will then be proportionately distributed among all creditors in the ratio of their unsatisfied claims. The draft proposal ideates additional power to the adjudicating authority, to allow mandatory admission of insolvency applications filed by financial creditors (FCs), and looks at expanding the scope of the pre-packaged insolvency scheme beyond the MSME sector.

Clarity is expected for quantification of disputed and contingent tax claims. The government is expected to notify the facilitation of recovery of tax dues from companies undergoing insolvency that could require its new owners to settle "agreed tax claims". As the objective of the IBC is quick resolution, failing which swift liquidation, clarity is needed on the inter-se rights of creditors with differing security interest not only in insolvency, but also in liquidation. 

There is also speculation on whether the government would let shareholders of large defaulters retain control of the businesses, while exploring fresh investments and corporate restructuring with its lenders outside the tribunals. The moral hazard that this brings up is whether such business promoters should be allowed to do so, in the first place. But then in cases of extreme influence, delays can also be used as a way to find the appropriate buyer, amenable to parties, and that could mean that the valuation might be lower than what could have been achieved with a speedier resolution. Concerns are valid to assume that some promoters might use such delays to buy their own assets at much cheaper valuations.

*Need IBC

As the IBC stands, the paramount decision making and upholding of the rights of the financial lenders is supreme. The Committee of Creditors (CoC) should be allowed to recover their dues, as they are custodians of public monies. This has also been accepted by the Supreme Court in many instances of challenges to the IBC. For the IBC regulator, the Insolvency and Bankruptcy Board of India (IBBI), the first objective of the IBC is resolution ‒ a way to save a business as a going concern ‒ through restructuring, change in ownership, mergers and other methods. The second objective is to maximise the value of assets of the corporate debtor and the third objective is to promote entrepreneurship, availability of credit, and balancing the interests. 

Despite much criticism of the IBC, one has to accept that it has proved far more effective than any other way of recovering lender monies. The correct way to validate its effectiveness would be to compare the resolution value to the liquidation value and not the total loans. With every new IBC case, there would be learnings in what regulatory revisions are needed, and legal upgrades. We would benefit from upgrading the IBC, like an App Store upgrade frequently. The dire side of not having the IBC is scary. For it ensures stability of the economy by strengthening the hands of the financial lenders. For confidence in the financial system, its ability to use regulations to recover its dues, in time and every time, is a must. For a robust economy, a work-in-progress IBC is a must. 

Dr. Srinath Sridharan - Author, Policy Reaearcher & Corporate Advisor 

Twitter : @ssmumbai 

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Insolvency and Bankruptcy Bill Magazine 11 Feb 2023