As the Indian
Bankruptcy Code (
IBC), one of the crucial reforms that gives India Inc the ‘right to exit’ and start afresh, completed five years, ETCFO spoke with
Jayant Sinha, former union minister and Chairman of the parliamentary standing committee on finance, to know if
liquidation is a scam under IBC? And more.
“Liquidation should not be a benchmark. And that is why we have to think carefully about what should be the benchmarks and a resolution process particularly for secured financial creditors,” said Jayant Sinha.
Almost half of the closed cases by lenders under IBC in FY21 ended in liquidation, as per the Insolvency and Bankruptcy Board of India (IBBI), while only 13 per cent were resolved. In most of the cases under IBC, by the time they are resolved, their asset value depreciates leading to 90% haircuts, according to IBBI
Specifically from the secured creditors perspective, when they lend against collateral they expect 100 per cent value back instead of “salvage or the liquidation value”.
“If that was to be the case, the kind of loans a company would be able to get would be very modest, because everybody’s just lending against liquidation value. We can’t have that,” Sinha said, underscoring the importance of having benchmarks.
These benchmarks are for secured financial creditors as there should be a very high level of confidence that they’re going to get the vast part of their loan back, he said.
But the question is how to decide the benchmark?
Sinha points to global benchmarks, the major economies that we compete with like Germany, Japan, China, the US, the UK. What secured financial creditors typically get through the resolution process should be the benchmark, he said.
Benchmark the quantum of haircut
In one of the recommendations, the parliamentary standing committee in its report titled, ‘Implementation of Insolvency and Bankruptcy Code: Pitfalls and Solutions’ was to benchmark the quantum of haircuts to avoid a 90 per cent haircut situation.
As per IBBI, in the resolved cases, the haircut, or the loss to banks on their claims, rose to 60 per cent in FY 2021, from 55 per cent average in the previous years. While in the March 2021 quarter alone, haircuts rose to a whopping 74 per cent of the claims made by the lenders against the defaulters.
While it is a matter of concern, how will benchmarking haircuts work?
Benchmarking haircut is not a prescription. It’s not a number that you have to meet. But it is something that should guide the committee of creditors in terms of how and how quickly they should go through the resolution process..
He believes that the system needs to gear up to deliver better outcomes. He feels there are many reasons why 40% recovery is happening. He ascribed these low recoveries to companies close to liquidation coming to IBC, processes that dragged on for a long time eventually eroding the value of the assets, apart from other reasons.
“Going forward, 40% cannot be the benchmark. It is not good enough. Whereas 5% is not good enough either. We need to do better for secured financial creditors. And the changes that we are suggesting are in support of all of that,” he said.
Role of NCLT
As far as delays in the process are concerned, one aspect is counter litigation by promoters. This costs money and time to the whole system. How should IBC deal with such issues, especially when NCLT is facing the challenge of capacity?
Sinha suggested three steps to reduce litigation.
Firstly, fill the vacancies at NCLT as quickly as possible because then there is more time to adjudicate a case well and come up with a good resolution.
If judges don’t have enough time and rush through cases, they won’t give good judgments, and then things will end up in litigation. Therefore, adding capacity as soon as possible is one way in which we can deal with these endless litigation type issues.
Secondly, improve the quality of NCLT members. The parliamentary committee has recommended that the NCLT should at least have high court judges so that we can benefit from their experience and their wisdom. That’s another way to prevent litigation.
The third way of preventing litigation is to ensure when people submit the resolution plan as per the deadline, they do not have an opportunity to come in with another resolution plan after that. Because not doing so, will again rest in litigation, and a lot of contentions back and forth.
“So these are three very concrete steps that we have suggested to reduce litigation as it is one of the reasons a lot of these timelines are being extended,” he said.
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