The Insolvency and Bankruptcy Code has had some successes and many failures so far, writes PN Vijay
When the bankruptcy code was passed five years ago, there was a lot of hope, not only in India, but throughout the global business community. No wonder that the following year India’s ranking in ease of doing business dropped from 108 to 52. However, after five years, with the exception of a few big hits, we have little to show in terms of the ease of doing business. code that has helped its stated objectives – to revive businesses, recover public money and protect jobs.
Bankers have so far taken a total haircut of 60 percent in all cases that have been resolved by the Insolvency and Bankruptcy Code (IBC) as of March 31, 2021. That is roughly the same as before the entry into force of the code. Obligate. So far, 1,277 of the total 4,376 companies subject to insolvency proceedings have been liquidated. The average time it takes for the process to be completed is over 450 days, compared to the stipulated 180 days, although, in part, this is due to the two waves of Covid we have been through. No wonder few ministers and officials are talking about it these days.
Straight haircuts for banks
In recent times, an opinion that is also gaining ground is that valuable companies are bought at very low prices, resulting in haircuts for banks, even above 90%. One example is the planned purchase of Videocon by Vedanta Group. In addition, there are cases where defaulting owners take over their businesses for a pittance. Hopefully these are one-off cases and don’t set a trend or scams.
The experience in the US and UK is better, with more money recovered and more businesses relaunched. But the process is different. In the United States, for example, there are Ch 7 and Ch 11. In Chapter 7, a company can file for liquidation; Chapter 11 is very similar to the IBC where the borrower and the lenders are trying to get the business going.
If we go further, there seem to be serious flaws that need to be fixed. One of the main reasons is the mindset of the lenders, which are mainly public banks and, in a few cases, private banks. These bankers have already canceled these loans and, therefore, they are the most reluctant to participate in a complex stimulus package which requires patience and often the commitment of working capital; in short, their attitude is “the faster we kill this one and bury the corpse, the better”.
Lack of expertise
The second reason is the lack of expertise among resolution professionals to accomplish what is surely the very complex task of restarting a business that has fallen ill. PRs, as they are called, are mostly corporate secretaries who have considerable expertise and experience in corporate governance but very little in recovery strategies.
As if that weren’t enough, excessive delays make takeovers nearly impossible, as sick companies go into limbo just when they need all the help they can get. Lawmakers – in their infinite wisdom – decided that 180 days was enough to complete a resolution process and in extreme cases it could be 270 days. But as stated earlier, the actual process takes a lot longer. Even after the submission of time-bound stimulus packages, offhand objections are taken into account and orders reserved. A former chief justice, in his very first speech after joining the Rajya Sabha, lamented that the Indian justice system had collapsed. This, along with the delays in punishing bad check violators are examples of this collapse.
I believe that a lot can be done to accomplish the mission the code has set for itself. We need to get lenders to engage in the stimulus process. The MoF and the RBI should bring back the heads of banks and tell them that their performance will be judged on their ability to revive companies in the CIRP process and bring back public money and jobs.
In addition, we need to strengthen the professional resolution system enormously. Just as “war is too serious a business to be left to the generals”, business takeovers cannot be left to people without knowledge of the business they are relaunching. We could – when loans involved more than Rs 5 crore – allow audit firms and management consulting firms to act as PR with a particular employee of the company being the actual PR. Third, we need to get the highest courts to review delays within the 180-day statutory deadline. In addition, almost half of the posts of judges remain vacant. These must be completed immediately.
The code should be changed to allow a borrower to liquidate themselves, such as Chapter 7 in the US and the Individual Voluntary Agreement (IVA) in the UK. This will ensure a quicker liquidation and the stimulus packages will receive a lot more attention. At present, the process makes it nearly impossible for a borrower to deposit under the code and deposits are invariably made by lenders.
The bankruptcy code was something we all wanted and achieved after years of discussion. Obviously, five years later, this is still a work in progress and requires considerable changes, both in the code and in its implementation.
The author is an investment banker and political commentator. His Twitter handle is @pnvijay