What lies ahead for IBC and stressed assets resolution?
The size of the haircut should not be the gauge of the success of the IBC process  The Insolvency and Bankruptcy Code (IBC), notified in 2016, has been the key mechanism for addressing corporate distress and the accumulation of bad loans in the financial sector since its implementation. Recent National Company Law Tribunal (NCLT) rulings have also put the spotlight on the IBC. In a conversation moderated by Suresh Seshadri, Aparna Ravi and R.K. Bansal discuss questions about the effectiveness of the process and the road ahead. Edited excerpts:  It has been five years since the IBC came into force. R.K. Bansal: One basic difference between us and other countries is that our companies are mainly promoter-owned and owners run the companies. In most of the developed countries, companies are run by professionals and the ownership is widely spread. Here, because it is owned and controlled as well as managed by mostly the same people, that creates a problem in taking over the asset. I think, overall, over the last five years, it has done quite well. And Section 29A [of the IBC], which was introduced by the government later, also helped in resolving some of these problems. I would say the recoveries and resolutions have been quite good, quite fast, compared to other measures available to the lenders. Today, on average, one can see maybe about three years [for recoveries and resolutions] as compared to an earlier timeline of five years, six years or more. But there are infrastructure issues. We need more NCLTs and we need more members. There are a lot of vacancies, a lot of delays in appointments, NCLAT [National Company Law Appellate Tribunal] benches are few. So, that is one area perhaps that we need to strengthen. The second issue is that a lot of these are very old cases  what we call stock of NPAs [Non-Performing Assets]. So, once this round is over, in future, perhaps, there will be fewer cases and we should be able to take care. The Act will do better actually, if not many cases go to the NCLT. Because the fear of losing the company under Section 49A will push the promoters to find a resolution. Aparna Ravi: The initial version of the IBC that came into effect in December 2016 is quite different from what we have today. But around this whole issue about the NCLTs functioning itself  I think there have been a lot of delays in implementation, whether its in terms of approvals, having an application admitted itself. In some situations, an application is filed for admission and it takes almost a year to actually be admitted. And even things like the approval of a resolution plan... The resolution plan that was approved for Jet Airways recently was actually approved by the Creditors Committee in October 2020. The NCLT has a very limited role: it just needs to approve the resolution plan based on whether the plan complies with applicable law. But it [resolution plan for Jet Airways] was only approved in June 2021. These kinds of delays are a significant issue with the implementation of the code, coupled with the fact that even though the Supreme Court has clarified a number of legal positions in the last few years around the IBC, it doesnt seem like in some situations the tribunals have laid to rest these positions. They still allow these same issues to be litigated again. This seems to me the biggest implementation challenge with the code itself. There are concerns about the extent of haircuts that banks and financial creditors are having to take in order to achieve resolution. RKB: I would not say they are misplaced, but I would say we need to understand the context. The haircut figure looks large in some cases because of many reasons. I remember the first case approved by the NCLT was Synergies-Dooray, where the haircut was 94%. But at that time this was not prominent as this was a smaller case. The claims filed are of three types: secured lenders, operational creditors, unsecured lenders, and then you have a lot of guarantee obligations of that company. Now, that guarantee obligation sometimes makes the dues multiple times that of a normal case. I have seen some cases where the total dues may be 500 crore, but because of the guarantee, the total dues claimed are from 6,000 crore to 7,000 crore. So, when the 500 crore company goes for resolution and you get a plan for 200 crore, it is 40%, so the haircut is 60%. But then if you compare this 200 crore figure with 7,000 crore-8,000 crore including guarantees, the haircut will look very large. And this happens typically in holding companies, which are the main companies and which have given the guarantees  whether it was OMML, Lanco Infra, or even recently Videocon, I mean those type of cases where there are a lot of assets, a lot of companies in the group, and guarantee has been given for many of these companies by this company. So, now, the question is haircut is relevant in the context of what is the asset, what are the debts, what are the guarantees, what are the other group assets. Now, out of the first 12 cases filed by the banks in 2017, even today, five got the resolution, which were steel cases because steel is a commodity sector and the assets are good. So, you got very good value in those. Out of five also their percentages are different, of course: Essar Steel or Bhushan Steel got quite a good value, then Bhushan Power and Steel somewhat lower, and Monnet was the least in those five cases. Then, you had a company called Binani Cement which was not out of the 12 but you got almost more than 100% because the asset was good. Then you had two, three cases which are going into liquidation, so banks may not get much  the haircut could be as high as 99% or 95%. Like Lanco Infra, which was a holding company again, or an EPC [engineering procurement and construction] company like Era Infra or Jyothi Structures. Finally, it depends on the company and its asset. You will get value if the asset is good. Some businesses would have failed, like many of the EPC companies, where haircuts are very high. Because basically in an EPC company there are hardly any assets, except some equipment. And some of them have diverted funds. Some of them lost money in contracts, government dues are there, government departments or entities actually withheld dues, levied a lot of penalties because of the delays. I think you need to understand that. AR: I dont think the size of the haircut itself is really a measure of the success of IBC. If the process itself is to improve, what we need to think about is how to attract more buyers or a more diverse range of strategic buyers to be willing to bid for assets, and submit resolution plans under the code. And I think a big part of that is improving the process in terms of minimising the delays, increasing the predictability. Those are issues that do need to be ironed out. AR: One thing is, of course, adherence to the timelines by all the stakeholders. The other area, from a legal point of view, is around who can submit a resolution plan itself. And I think on that Mr. Bansal too had a number of views on Section 29A that prevents promoters, in a lot of cases, from submitting resolution plans. I understand the rationale behind this, and there are some restrictions under Section 29A that make a lot of sense  for example, a wilful defaulter probably should not be allowed to submit a resolution plan under the IBC. But some of the other restrictions such as one on [a promoter] who has had NPAs for over a year, or whos had a personal guarantee that has been invoked... in those cases I think that would result in a lot of the promoters of most companies not being able to submit resolution plans. There has been a relaxation which allows MSMEs to have greater flexibility in terms of promoters being able to submit resolution plans for these companies. This is something that can be considered just to lay the floor open to a larger number of resolution plans. Of course, nobody is required to accept a resolution plan. There needs to be a fair process where many of the processes are open to a number of people. Allowing certain relaxations to Section 29A could be helpful. RKB: The national ARC (Asset Reconstruction Company), or so called bad bank, should help. Its a good thing because its a one-time exercise, a good clean-up exercise. Because a lot of these cases dont have a great resolution plan or they dont have great value left. So, many of these cases perhaps need to be warehoused for some time. If I try to sell a power plant today in thermal power, we may get a value of only 2 crore per megawatt, while the country will still need power and a power plant requires 5 crore-6 crore per megawatt just to build up because there is excess capacity, because there is a problem in the thermal power sector. The other point is that there are not many strategic investors. An asset will have interest or value only if there are more people who are ready to buy, like say the steel cases, where there were a number of suitors. But today in power, theres hardly one or two people in India who will be interested in buying power assets, and typically foreign players dont buy thermal power because of the coal issue and social issues. So, what happens is, today you need to wait for some time for some of these assets. You have to work along, then your recovery will be far, far better. A national ARC will give the time to the banks to resolve these cases over a period of time. AR: What we do see is that sometimes there isnt an appointment made for these benches for some time... theres one judicial member who is in charge of two benches. Some of those NCLT benches only function on certain days of the week because thats when the judicial member or the technical member are both available, so definitely there needs to be capacity building in terms of NCLT. Its also worth considering that the IBC cases are not the only mandate of the NCLT. They also consider various cases under the Companies Act such as mergers or oppression and mismanagement cases. A different point is also to remember that the IBC is not the only solution for resolving stress. Its important to look at a range of different options both within and outside the IBC for resolving distress, and especially through these pre-IBC mechanisms, one-time settlements, restructuring packages. Its important to look at them all as part of the spectrum. Especially in cases where there is some consensus with the debtor and the debtor and the creditors, these pre-IBC resolutions may work very well as well.