Parliamentary panel that includes former PM Manmohan Singh wants IBC overhaul, BFSI News, ET BFSI

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A parliamentary standing committee led by former Union minister Jayant Sinha set up to examine the workings of the Insolvency and Bankruptcy Code (IBC) has recommended an overhaul of the present system including a threshold rate of haircut for creditors.

The 29 member committee includes former prime minister Manmohan Singh.

Low recovery rates with haircuts as much as 95% and 71% of the cases pending beyond the 180 days timeframe envisaged by the law point towards a deviation from the original objective of the Code.

“As the insolvency process has fairly matured now, there may be an imperative to have a benchmark for the quantum of “hair-cut”, comparable to global standards,” the committee said without specifying what this benchmark could be.

It noted that though the new code has helped in substantially improving credit culture, there are long delays in cases due to the time taken to admit cases, allowing bidders even after the deadline and various challenges to the NCLT judgements.

The committee also expressed apprehension about fresh graduates being appointed as resolution professionals (RPs) expressing doubts over their handling of large cases. It pointed out that regulatory action has been taken in 123 out of the 203 cases examined by the Insolvency and Bankruptcy Board of India (IBBI).

The panel’s suggestions

Only high court judges be appointed to the National Company Law Tribunal (NCLT) to ensure quicker disposal of cases.

Instead of having multiple insolvency professional agencies (IPAs) a single body may be formed to oversee and regulate RPs.

Bring a professional code of conduct for the committee of credtors (CoC) the main decision making body approving a resolution plan and also a set of guidelines for the appointment of RPs to ensure transparency in the CoC.

NCLT should accept defaulters within 30 days and transfer control to a resolution process within this time period.

IBC needs to be amended so that no post hoc bids are allowed during the resolution process.

Involving national law schools so that conduct research, training and also provide support in the form of law clerks.

It has suggested dedicated benches of the IBC within the NCLT and also special benches for micro and small enterprises for quicker disposal of cases.

RPs should also be allowed to sell company assets depending on the demand, in parts to multiple bidders rather than in a block to get maximum value.



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Parliamentary panel suggests capping ‘haircuts’ after furore over Videocon, Siva settlements, BFSI News, ET BFSI

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A parliamentary panel has suggested having a benchmark for the “quantum of haircut” in an insolvency process amid instances of financial creditors taking steep haircuts on their exposure to stressed companies.

Besides, the committee has pitched for measures to prevent protracted litigations with respect to an insolvency resolution process.

The Insolvency and Bankruptcy Code (IBC), which came into effect in 2016, provides for a market-linked and time-bound resolution of stressed assets.

Emphasising that the fundamental aim of the Code is to secure creditor rights which would lower borrowing costs as the risks decline, the panel said there is a need for greater clarity in purpose with regard to strengthening creditor rights through the mechanism devised in the Code.

On haircuts

The committee flagged that “the low recovery rates with haircuts as much as 95 per cent and the delay in resolution process with more than 71 per cent cases pending for more than 180 days clearly point towards a deviation from the original objectives of the Code intended by Parliament”.

The committee particularly mentioned about the “disproportionately large and unsustainable ‘haircuts’ taken by the financial creditors over the years”.

In some insolvency resolution processes, the haircuts taken by creditors were more than 90 per cent.

“As the insolvency process has fairly matured now, there may be an imperative to have a benchmark for the quantum of ‘haircut’ comparable to global standards,” it noted.

A haircut refers to losses incurred by creditors on resolution of a stressed asset.

The suggestions have been made by the Standing Committee on Finance in its report on the ‘Implementation of Insolvency and Bankruptcy Code – Pitfalls and Solutions’. The report was tabled in Parliament on Tuesday.

On delays

It is a matter of grave concern for the committee that the insolvency process has been stymied by long delays far beyond the statutory limits. It is disconcerting that even admission of cases in NCLT has been taking an unduly long time, which thus defeats the very purpose of the Code, the panel noted.

After about half a dozen amendments in five years, the IBC seems to have deviated from its original objectives, thanks to inordinate delay in resolution and the low recovery rate with haircuts running up to 95% in few cases, the Parliamentary Standing Committee on Finance said in a report.

As many as 13,170 insolvency cases involving claims of Rs 9 lakh crore are awaiting resolution before the National Company Law Tribunal (NCLT), the report tabled in the Lok Sabha on Tuesday said.

The committee also pointed out that there have been instances of frivolous appeals, which further drags the resolution/ recovery process leading to severe erosion of asset value.

Abuse of provisions

The panel said it would therefore recommend that misuse/ abuse of well-intended provisions and processes should be prevented by ensuring an element of finality within the statutory stipulated period without protracted litigation.

There have been six amendments to the Code so far.

According to the committee, any legislative enactment and implementation need to constantly evolve to meet the challenges in the ever-changing ecosystem.

However, the panel said it is of the opinion that “the actual operationalisation of amendments made so far may have altered and even digressed from the basic design of the statute and given a different orientation to the Code not originally envisioned”.



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‘IBC is a success, now time to bring individual, group and cross border insolvency’, BFSI News, ET BFSI

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India’s Insolvency and Bankruptcy Code (IBC) has been a success so far in its five years of existence and has brought about a “significant change” in the corporate landscape of India in terms of credit culture, feels Biswarup Basu, President at the Institute of Cost Accountants of India. He suggests now is the time to bring individual, group and cross-border insolvency frameworks to further strengthen the framework. Edited excerpts.

Q: What is your take on the IBC regulation? Five years gone, would you read it as a success or a work in progress?

IBC is one of the deepest economic reforms adopted in India. In the last five years, it has brought about a significant change in the corporate landscape of India in terms of credit culture, unlocking of value from the non-performing assets, and the equation between debtors and creditors. This has resulted in putting a large amount of money back into productive channels. It is a nascent law.

Five years in the journey of a law of critical importance is too short, so in a way, there are constant restructuring / amendment of several provisions of the IBC to make it conducive so as to achieve its objectives. So it’s been a success but still the provisions of individual insolvency, cross border insolvency, group insolvency are yet to be notified / operationalised, and to that extent, one can say that it is a work in progress..

Q: What’s your view on 90% haircuts seen in three high profile cases, Jet, Videocon, and Siva?

The objective of IBC is primarily rescuing a company in distress and not recovery. So the outcome of various cases under IBC till now has to be seen in that context. Moreover, the haircut depends upon the stage of distress at which the company is brought into the IBC framework. All these companies were brought under the umbrella of IBC at a much later stage of distress, by which time most of the value of the assets of the company had already been eroded.

Q: Would you say IBC has its limitations and can’t satisfy everyone at the end of the day?

The law stands on its principles and objectives and all the stakeholders accordingly may not have similar outcomes from an IBC matter.

it may be noted that the law is not adversarial in nature where one party wins and the other loses. It seeks to balance the interest of all stakeholders to the extent possible whereby it is not possible to make everyone happy..

Q: What three challenges exist in the current IBC framework? What changes would you propose?

First, the timelines provided under IBC are not being met in the majority of the cases due to litigation and also lack of capacity of NCLT / NCLAT to deal with the large number of cases brought up before them. The NCLT / NCLAT should be strengthened in terms of manpower. Maybe separate benches could be created to deal with IBC matters.

Second, cross border insolvency provisions have not yet been notified. There are many companies that have assets located in multiple jurisdictions. It is suggested that the government should give this matter priority to further enhance the scope of IBC.

Third, individual insolvency provisions have not yet been notified. This should be operationalised sooner to provide succour to the Individuals facing financial hardships.

'IBC is a success, now time to bring individual, group and cross border insolvency’Q: There is a view that the regulators or statutory bodies take their own decisions even after resolutions are approved successfully by the NCLTs. Should there be more clarity on which law is superior?

It is well settled law that once a resolution plan is approved by the adjudicating authority it becomes binding on all stakeholders. There is enough clarity in this regard.

Q: How can CMAs play a role in the resolution of assets under IBC? Today a lot of insolvency professionals are CMAs…

Many CMAs have become insolvency professionals and are regularly handling various cases under IBC. Besides acting as the interim resolution professional / resolution professional, CMAs can also assist in carrying out due diligence, forensic audit, preparation of Information Memorandum, and preparation of resolution plan.

Q: Last, CMAs as RPs have been or are being litigated against quite a lot by promoters or dissenting lenders over haircuts. How should the RPs deal with such a situation?

Many promoters, who find themselves on the verge of losing control of their companies, try to find some way out or at least try to drag the matter longer and thus involve resolution professionals in litigation. The RP should have confidence in his actions, maintain proper documents relating to CIRP, and justify his action appropriately before the adjudicating authority.

ALSO READ: ‘IBC can’t make everyone happy, Videocon case will help law mature further’



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IPs to face penalty for non-compliances

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Insolvency regulator IBBI has come up with a novel step to ensure Insolvency Professionals ( IPs) better discharge their duties and at the same time help distinguish the performers and non-performers amongst them. It has come up with a graduated system of levy of monetary penalty for minor non-compliances by the IPs.

For this purpose, the Insolvency & Bankruptcy Board of India (IBBI) has now directed the three Insolvency Professional Agencies (IPAs) to amend their bye-laws so as to provide maximum and minimum monetary penalty for certain non-compliances by IPs registered with such agencies.

Till date, there are three IPAs registered with the IBBI. These are ICSI Institute of Insolvency Professionals, Indian Institute of Insolvency Professionals of ICAI and Insolvency Professional Agency of Institute of Cost Accountants of India.

Monetary penalty

The IPAs have now been directed to provide for the maximum and minimum monetary penalty in the interest of objectivity and uniformity. The penalty will be imposed where the Disciplinary Committee of the IPAs decides to impose such penalty on its professional members.

As many as 14 contraventions have now been listed out by the IBBI in a circular along with the minimum and maximum penalty that can be imposed.

The contraventions include failure to submit disclosures, returns etc. to IPAs or incorrect disclosures, returns relating to any assignment as required under IBC (penalty of upto ₹1 lakh or 25 per cent of fee, whichever is higher, subject to a minimum of ₹50,000); accepting an assignment having conflict of interest with stakeholders (upto ₹ 2 lakh or 25 per cent of fee, whichever is higher, subject to a minimum of ₹1 lakh), etc.

Experts’ views

Ashok Haldia , Chairman of Indian Institute of Insolvency Professionals of ICAI, said “Prescription of a graduated system of monetary penalty for minor non compliances is welcome as it would bring in objectivity and uniformity in dealing with cases within an IPA and across all the IPA. It differentiates between non compliances and violations.”

Abhishek Saxena, Co-founding Partner, Phoenix Legal, said this marks a welcome step to ensure better diligence and integrity in the system.

Nakul Sachdeva, Partner, L&L Partners, said “The circular would lead consistency in the quantum of penalty imposed”.

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Videocon resolution may be back to square one after NCLAT stay, BFSI News, ET BFSI

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After NCLAT stayed the order of the NCLT of Mumbai Bench, the process of Videocon Industries’s liquidation case may start all over again. Legal experts also believe that SBI-led creditors may not do anything but the bid winner Anil Agarwal’s Twin Star may appeal in Supreme Court against the NCLAT order.

“As of now, NCLAT has stayed the order. The creditors (appellant) were possibly challenging the entire bidding approved by NCLT on the grounds that some procedures might not have been followed, opinions not being considered. Now there are high chances that the entire process can restart,” said Vikas Tomar, Partner, Indian Law Partners.

There are 35 financial creditors of Videocon, of which 19 major creditors, including SBI, Union Bank, IDBI, Central Bank, BOB and ICICI Bank approved the resolution, which includes the 95.85% haircut. But three minority shareholders, Bank of Maharashtra, SIDBI and IFCI rejected the resolution on the ground of low resolution and filed an appeal in NCLAT.

Large versus Minority Creditors versus Bidder

The plea of minority shareholders is heard and the whole case will move in a direction to get more benefits for the financial creditors.

“Banks are normally prepared to take a 60-70 per cent haircut on payments if an insolvency process is initiated. The bid was also rejected on the grounds that they should be compensated upfront and in cash rather than through NCDs. Accepting this bid will just increase the banks’ losses, and now their only option is to call for bids from interested parties,” said Sonam Chandwani. Managing Partners, KS Legal and Associates.

The main ground of the minority shareholders was the low resolution amount.

“The large financial creditors like SBI and others may prefer to keep quiet and wait for the court to do its process. But there are high chances that Anil Agarwal’s Twin Star Technologies may appeal in Supreme Court against NCLAT order,” said a legal expert who did not want to be identified.

There were 11 bidders for Videocon but only three had bid for the whole Videocon’s group assets. The majority of them had bid for only a particular division of the company. Hence on one side, there is a big hope that minority shareholders will recover more, but on the other side there the whole process may take a long time.

The Videocon resolution case has been one of the most dramatic in the IBC process. Starting from Chanda Kochchar, former MD and CEO, ICICI Bank losing her job and facing trials with investigative agencies for irregularities in the giving loans to the group, to the fresh challenge to the resolution process, it has been a bumpy road.



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About 96% of Rs 2.45 lakh crore recovered under IBC resolutions came from top 100 accounts, BFSI News, ET BFSI

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Amid the rising furore over huge haircuts taken by lenders in high-value resolutions under the Insolvency and Bankruptcy Code, the government has said that financial creditors, including banks, realised Rs 2.45 lakh crore from approved resolution plans for 394 corporate insolvency resolution cases under the Insolvency and Bankruptcy Code as on June 30.

Of which Rs 2.37 lakh crore came through approved resolution plans of top 100 CIRPs, which is over 36 per cent of the admitted claims.

About 4,540 cases were admitted for the corporate insolvency resolution process under IBC until June 30, 2021.

About 240 companies liquidated till December 2020 had outstanding claims of Rs 33,086 crore, while their assets were valued at Rs 1,099 crore.
Overall, banks recovered Rs 14.18 lakh crore during the last three fiscals, raising the percentage of recovery to their gross NPA from 13.1 per cent in FY18 to 15.1 per cent in FY19. However, the recovery ratio has dropped 12.8 per cent in FY21 from 15.8 per cent in FY20 in the backdrop of the pandemic.

Recovery rate

The recovery rate of IBC has fallen to 39.3% as of March 2021 from 46% as of March 2020. Of the total outstanding amount of Rs 1.32 lakh crore, only around Rs 25,944 crore was recovered in fiscal 2021, or a rate of 19.7%.

There has been a delay in the liquidation of companies. As of December 2020, around 69% of the liquidations were going on for more than one year, while in the case of 26% of companies the process was on for more than two years.

Economic downturn

With huge capacity unutilised in the economy, companies are not looking to add more capacity, which is impacting the sale process at IBC. Barring sectors like steel where the product cycle has seen a turnaround, assets in other sectors such as textiles are not seeing much interest. While steel assets such as Essar Steel and Bhushan Steel were snapped up, those such as Alok Textiles were sold for much less.

The pandemic has increased operational challenges for the various parties involved in a CIRP, which resulted in limited cases yielding a resolution plan. The suspension of new proceedings under the IBC for the entire FY21 resulted in a sharp slowdown in the resolution process.

The slow judicial process in India allows the resolution processes to drag on, this was the same reason for slow recovery under SICA or RBBD.

Litigations by promoters not wanting to let the company out of their hands is also delaying the IBC process.

Lenders wanting to avoid delay in the recovery process and erosion of value are striking settlement deals with promoters, which defeats the purpose of the legislation.

Fiscal 2022 hopes

Financial creditors could realise about Rs 55,000 crore to Rs 60,000 crore in FY2022 through successful resolution plans from the IBC, estimates rating agency Icra. The higher realisation by the financial creditors would depend on the successful resolution of 8-9 big-ticket accounts, with more than 20% of estimated realisation for the year could be from these alone.



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Former RBI DG, BFSI News, ET BFSI

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MUMBAI: The government’s move to privatise two state-owned lenders presents an “exciting” opportunity for investors looking to get into the business, former RBI Deputy Governor N S Vishwanathan on Thursday said.

What is good for the country will have to be looked at while deciding on the entity, which will be granted a license, he said while speaking at an event of industry lobby IMC Chamber of Commerce and Industry.

Replying to suggestions asking for entry of corporates and concerns over ownership and voting caps, Vishwanathan said world over, including the developed countries, there are restrictions on who is allowed to start a bank, which deals with people’s deposits.

On the point of corporates having the capital to plough into an entity, he said a real economy entity will also be affected by stress in the broader economy and we ought to defend against the stress from other businesses seeping into a bank.

“The government’s thought process of privatising a couple of public sector banks provides an excitable opportunity in that space,” Vishwanathan, who used to handle the all-important banking regulation and supervision functions at the central bank, said.

Vishwanathan said while the Insolvency and Bankruptcy Code (IBC) did well in the initial days, concerns are coming out over the recovery ratios lately and stressed that the same needs to be “addressed”. The remarks came in the light of the resolution in the Videocon case, where lenders have been offered only 5 per cent recovery.

Abizer Diwanji of consultancy firm EY said defaults are bound to happen in the banking business, but one has to deal with them upfront rather than taking 5-7 years to deal with it.

The delay in resolving the stress can erode value, which can be realised, he said, adding that the assets that are yielding very low-resolution percentages could fetch upwards of 50 per cent if the resolution attempts were made earlier.

Vishwanathan said we will first have to resolve whether to allow corporates or not before deliberating on whether those having NBFCs should be given the opportunity to run a bank.

Warburg Pincus‘ Narendra Ostawal said private equity firms like his will be interested in investing in the bank privatisation process and see it as a “huge opportunity”.

“The core issue here is regulatory. What is the extent of economic ownership and governance control an owner would get through the privatisation process? I think that will drive the success,” he said.

The PEs need degrees of freedom in terms of governance and commensurate ownership like getting new management, he said, adding more fractured ownership you have, the tougher it is to build consensus around the turnaround.

Vishwanathan said all over the world, banks have a dispersed holding structure and added that the promoter is required to have a certain level of ownership as well.



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Banks to invoke sureties given by promoters of 17 defaulting cos

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Several banks, including State Bank of India and Bank of Baroda, are moving to invoke the personal guarantees given by promoters of 17 defaulting companies including Punj Lloyd, Amtek Auto, ABG Shipyard, Videocon, Varun Shipping, and Lanco. They have approached the National Company Law Tribunal.

“Banks have decided that for invoking the personal guarantees, only the lead lender in each case will go to the NCLT. Applications have been filed before NCLT Benches in Delhi, Ahmedabad, Kolkata and Mumbai,”said a source.

In May, the Supreme Court upheld the amendment to the Insolvency and Bankruptcy Code that allowed lenders to invoke the personal guarantees of promoters to recover their dues. This came as a major relief for lenders as under the corporate insolvency process, they are able to recover 35-40 per cent of the total debt in most cases. Now, in the absence of a credible repayment plan, creditors can initiate bankruptcy proceedings against the promoters. According to a PIL in the Supreme Court, lenders can recover ₹1.6-lakh crore from 40 defaulting promoters through this route.

Post SC order, banks move to assess value of promoters’ assets

However, one major hurdle is that many promoters are scam-tainted and are being investigated for fraud. DHFL’s former promoter Kapil Wadhawan, for example, is in prison for alleged fraud. “Most of these promoters in default are scam-tainted and their multi-billion rupee assets already attached by the Enforcement Directorate and the Economic Offences Wing of the Police. Getting the assets released from these agencies will take its own time,” said a lawyer on conditions of anonymity as he represents a defaulting promoter.

Nakul Sachdeva of L&L Partners, said though there is the Supreme Court judgment, the procedure for invoking personal guarantees is yet to be fully tested.

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IL&FS recoveries may top 61%, lift sagging IBC average in 2021, BFSI News, ET BFSI

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Amid the near liquidation value recovery of Videocon and Siva Industries assets, IL&FS resolution may bring some cheer for the lenders.

At the group level, it is likely to recover 61% against the average 39% for IBC overall. The average IBC recoveries for the last fiscal had dropped to a quarter.

IL&FS is likely to recover Rs 61,000 crore assets from the group debt of Rs 99,000 crore as of October 2018, an increase of 5,000 crore over the earlier estimate.

“Between now and September 2021, we see this (Rs 43,000 crore of addressed debt) number going up in excess of Rs 50,000 crore. Thereafter, we are increasing our overall estimate of what we think we can resolve to Rs 61,000 crore, or close to 62 per cent, of the total debt,” Kotak said. The upgrade in potentially addressable debt by Rs 5,000 crore (to Rs 61,000 crore) has been largely on account of improved valuations, better operating performance and enhanced recoveries from non-group exposures, the Group had said in September. This includes the debt addressed through resolution, restructuring and liquidation across 347 IL&FS companies.

According to the quarterly newsletter of the Insolvency and Bankruptcy Board of India for March 2021, the recovery through resolution amounted to about 39% and through liquidation around 4%. According to bankers, recovery in the IBC process has had extreme outcomes.

The IL&FS playbook

As of end-March 2021, of the 347 entities, 186 have been resolved with Rs 43,000 crore of debt addressed.

The 347 companies in the group have been reduced to 167 and are expected to drop further to below 100 by the end of the year. This was done by shutting down or selling off a large number of foreign and local subsidiaries.

In the case of road projects, where conventional investors were spoilt for choice given the road projects on

sale, the board decided to go for the alternative option of setting up an infrastructure investment trust (InvIT).

While the new board has addressed a major chunk of the debt, the challenge is resolving IL&FS Financial Services and the remaining cases of dozens of companies where the amounts involved are relatively small. In the case of I-FIN, the board is understood to have dropped the plan to sell Rs 5,000 crore worth of loans after bids came in the range of 5%.



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Why IBC process has slowed down during pandemic, BFSI News, ET BFSI

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The Insolvency and Bankruptcy Code (IBC) is a vast improvement over the n the two earlier laws legislated to recover bad loans —the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDB) and Sarfaesi.

Before IBC, resolution processes took an average of 4-6 years, after the enactment of IBC, they came down to 317 days.

However during the pandemic, the IBC process has been hit, with recovery rate dropping, and anxious lenders selling off assets at close to liquidation value or striking settlement deals with promoters.

Recovery rate

The recovery rate of IBC has fallen to 39.3% as of March 2021 from 46% as of March 2020. Of the total outstanding amount of Rs 1.32 lakh crore, only around Rs 25,944 crore was recovered in fiscal 2021, or a rate of 19.7%.

There has been a delay in the liquidation of companies. As of December 2020, around 69% of the liquidations were going on for more than one year, while in the case of 26% companies the process was on for more than two years.

Economic downturn

With huge capacity unutilised in the economy, companies are not looking to add more capacity, which is impacting the sale process at IBC. Barring sectors like steel where the product cycle has seen a turnaround, assets in other sectors such as textiles are not seeing much interest. While steel assets such as Essar Steel and Bhushan Steel were snapped up, those such as Alok Textiles were sold for much less.

The pandemic has increased operational challenges for the various parties involved in a CIRP, which resulted in limited cases yielding a resolution plan. The suspension of new proceedings under the IBC for the entire FY21 resulted in a sharp slowdown in the resolution process.

The slow judicial process in India allows the resolution processes to drag on, this was the same reason for slow recovery under SICA or RBBD.

Litigations by promoters not wanting to let the company out of their hands is also delaying the IBC process.

Lenders wanting to avoid delay in the recovery process and erosion of value are striking settlement deals with promoters, which defeats the purpose of the legislation.

Fiscal 2022 hopes

Financial creditors could realise about Rs 55,000 crore to Rs 60,000 crore in FY2022 through successful resolution plans from the IBC, estimates rating agency Icra. The higher realisation by the financial creditors would depend on the successful resolution of 8-9 big-ticket accounts, with more than 20% of estimated realisation for the year could be from these alone.



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