Date: 31/01/2023

Relevance: GS-2: Government Policies and Interventions for Development in various sectors and Issues arising out of their Design and Implementation.

Relevance: GS-3: Indian Economy and issues relating to Banking, Insolvency, NBFC etc.

Key Phrases: Insolvency and Bankruptcy Code (IBC), Ministry of Corporate Affairs, Financial Services, Non-Banking Financial Companies, National Company Law Tribunal(NCLT), NPA, Regulatory Framework, Adjudicating Authority(AA), Customer Protection.

Context:

• Recently, the Ministry of Corporate Affairs issued a notice inviting online public comments on the proposed amendments in the Insolvency and Bankruptcy Code (IBC) 2016.

Key Highlights:

• Latest round of proposed amendments to expedite resolutions is the most sweeping in scope since the inception of the law in 2016.

Issues in IBC 2016:

• More Liquidation than Resolution
  • As per the IBBI data for the 3,400 cases admitted under the IBC in the last six years, half or more than 50% of the cases ended in liquidation, and only 14% could find a proper resolution, which is the first objective.
    • While the situation was better in 2016 and 2017, since 2018, a majority of the cases ended in liquidation in most of the quarters while cases for which resolution plans were approved ranged between 15% and 25%.
• More Time taking
  • Delays by lenders in approaching the National Company Law Tribunal with NPA cases, delay by the NCLT in admitting such cases, and delay in the process itself are the major factors contributing to this process making it more time-consuming.
  • The IBC initially stipulated a 180-day deadline to complete the resolution process, with a permitted 90-day extension.
    • The IBC was subsequently amended to further make the total timeline for completion 330 days— almost a year.
  • While in 2018, when the timeline was 180+90 days, most cases (from companies that owed less than ₹50 crores to those which owed more than ₹1000 core) were completed in under 300 days.
    • However, in FY22, it took 772 days to resolve cases involving companies that owed more than ₹1,000 crores.
  • The average number of days it takes to resolve such cases increased rapidly over the past five years.
• Narrowing the Gap Between Values under Resolution and Liquidation
  • When a resolution happens, it is envisaged that creditors can realize the maximum value of the outstanding claims.
    • On the other hand, when liquidation takes place, it is a piecemeal selling of the company’s assets.
    • This means the value realizable through resolution should be more than through the last resort of liquidation.
  • But the gap between these two values has been narrowing over the years, and in the last quarter of 2022, the amount realized fell below what the assets would have fetched if they were liquidated.
• Haircuts
  • A haircut is a debt foregone by the lender as a share of the outstanding claim.
  • The Parliamentary Stan­ding Committee on Finance pointed out in 2021, that in the five years of the IBC, creditors on average had to bear an 80% haircut in more than 70% of the cases.

Proposed Amendments:

• Speeding up the Admission of Cases
  • With respect to speeding up admissions, the latest proposal seeks to remove the discretionary power of the adjudicating authority (AA) once a default has been established by information utility.
• a clear framework for out-of-court approaches in order to fast-track resolution
  • To ensure fast-track resolution, an “informal” out-of-court settlement may be initiated by “unrelated” financial creditors with the AA overseeing the process.
• Pre-pack insolvency resolution process for all entities
  • The pre-pack insolvency resolution process, introduced for the benefit of MSMEs in the wake of Covid, where the financial creditors cobble a plan and get the court’s nod, is sought to be extended to all entities.
• Clubbing defaults in the case of group entities for efficient resolution
  • The law would require tweaking to deal with ‘group resolutions’ where defaults tangled between parent and group companies would have to be seen as one.
  • The principle of separating a defaulting project from the rest has been spelt out specifically with respect to real estate, keeping the interests of home buyers in mind.
    • However, it is as yet unclear how this segregation can be made, except by creating a special-purpose vehicle.
• New Waterfall Mechanism for Distribution
  • To deal with distribution, a new waterfall mechanism has been suggested where the financial creditors will get up to 100 per cent of the liquidation value, while the rest of the proceeds realized on the resolution of the debt will be distributed ‘rateable’ between stakeholders.

Way Forward:

• In pursuing the fast-track options, it must be kept in mind that the moratorium on assets may not hold, posing a risk to the going concern. In the case of pre-pack, the debtor remains in possession.
  • Therefore, while expanding the scope of pre-pack it is important to ensure that errant promoters do not benefit.
• A new yardstick to measure haircuts should be implemented for measuring the haircut.
  • It is suggested that haircuts not be looked at as the difference between the creditor’s claims and the actual amount realized but as the difference between what the company brings along when it enters IBC and the value realized.

Conclusion:

• The proposed changes will help IBC to deliver on its promise better and in the improvement of the doing of business in the country.

Source: Business Line

Mains Question:

Q. Analyze the proposed amendments in the Insolvency and Bankruptcy Code (IBC) 2016 in the light of making the process fast and efficient. (250 Words).