Despite the fact that the Insolvency and Bankruptcy Code (IBC) has done a lot to punish promoters and assist lenders in recovering their debts, it is likely that expectations have been disappointed. It's pointless to compare the success ratios of the corporate insolvency resolution process (CIRP) to those of prior regimes' processes—SICA, DRT, SARFAESI, and so on—because those systems were, to put it bluntly, horrible. The IBC was meant to be the cure-all for all ills, the ultimate panacea. However, in an atmosphere where promoters have always ruled the roost, crony capitalism has been prevalent, bankers have been irresponsible and thoughtless, and corruption has pervaded nearly every stratum of the financial system, it was a stretch to imagine that a new Code would put things right. Nothing makes our promoters happier than a good fight; they can dig in their heels and conjure up enormous quantities of money at the last minute.
Essar Steel may never have been sold to Arcelor Mittal if it hadn't been for the prompt intervention of the corporate affairs ministry, which changed the legislation to prevent wilful defaulters from regaining control of their enterprises under the watchful eye of former finance minister Arun Jaitley. But, on the day Arcelor Mittal took ownership of Essar Steel, we realised we'd discovered the best approach to cope with bankruptcy.
To be sure, the Code has flaws, but as we modify the regulations, let us also ensures that all parties participating in the process are held more accountable. Interminable delays, excessive levels of haircuts, opacity in the liquidation process, and over-empowered liquidators are among the most serious issues that have been identified. The action of the Committee of Creditors (CoC), basically the bankers, has also aroused eyebrows. Last Friday, corporate affairs secretary Rajesh Verma announced that empty seats on the NCLT and NCLAT benches had been filled. That was long overdue, but resolution deadlines should be lowered as well—at most 90 days—with some leeway for unforeseen circumstances. Judges must be more stringent and reject needless interruptions and frivolous litigation, which has been rampant among incumbent promoters.
The razor-sharp haircuts have caused a lot of indigestion. With a few instances, they've been astronomically high. In the case of Alok Industries, for example, banks only collected 5,000 crore out of a total claim of almost 30,000 crore. However, it is also true that lenders granted disproportionately huge sums without adequately assessing the firm, and as a result, the recoveries may look tiny in comparison to the debts owed. The asset's worth is ultimately decided by the demand for it. We must remove any opportunity for collusion between lenders and potential purchasers, which necessitates the creation of a code of conduct for the CoC. Without casting any aspersions or criticizing the banks for the high rate of haircuts, it must be stated that lenders have a history of acting haphazardly.
For example, their treatment of Siva Industries left a lot to be desired. Their actions were incomprehensible, ranging from a one-time settlement (OTS) for a pittance of approximately a tenth of the dues of Rs 4,864 crore to abandoning bankruptcy proceedings and seeking to return the firm back to the promoters, with full control, for a pittance. The NCLT's Chennai bench stated in a brief statement that it will rely on its "judicial wisdom" rather than the CoC's "commercial wisdom." Indeed, agreeing with a settlement agreement that nets them 328 crore would be frowned upon. The firm was ordered to be liquidated by the NCLT Chennai. The Mumbai NCLT bench had previously noted how intriguingly near the winning bid for Videocon Industries—made by Anil Agarwal's Twin Star Technologies—was to the liquidation value. “Surprisingly, the resolution applicant also evaluated all of the assets and liabilities of all 13 businesses and arrived at nearly the same value as the registered valuers,” the court said in its ruling.
The OTS system is in desperate need of an overhaul. The intention was to provide all parties with a greater chance of settling the dispute and preserving capital, but the Siva case shows that the clause might be abused. However, it would be naive to believe that all financing transactions will be legitimate and that promoters will cease syphoning cash from the company overnight; India's corporate governance standards have a long way to go. However, a threshold value for an OTS may be established to guarantee that banks do not incur a large hit.
Banks, for example, must get a minimum of 25% of the agreed-upon sum upfront, with the remainder paid in instalments. The section of the Code that enables an insolvency application to be withdrawn if 90 percent of the CoC votes in favour of it should not be changed. It is a way out for lenders, who may eventually realise that the CIRP isn't such a horrible idea after all. Lenders deserve the ability to opt-out of the insolvency process as long as there are no bad motives. Experts have called for additional monitoring because they believe the liquidation process is not transparent enough.
When it comes to choosing specialists and setting reserve prices for auctions, the Insolvency and Bankruptcy Board of India wants the Stakeholders' Consultation Committee to have additional power. It wants more accountability from liquidators. In fact, the Code would be strengthened if there was a bit more responsibility across the chain.
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