We are talking about amendments to the Insolvency and Bankruptcy Code (IBC) within a year. What does it indicate?
The one year of IBC so far has been good. Many questions were asked on how it will work, especially regarding speed, because the time-frame was tight — 180 to 270 days maximum. How will the NCLT, the appellate tribunal, the judiciary cope with this? There have been so many cases — 450 cases. That itself tells you that it’s gone well. In a majority of cases, they have kept to the stringent timelines at all levels — the NCLTs, appellate tribunals, high courts, and in several instances, even the Supreme Court. All of them have moved swiftly. So, we should give credit where it is due.But there are complaints about the quality of insolvency professionals…
This is a new profession. There was no such thing as insolvency professional. Now, I’m sure in one year, we will have 1,000-1,500 new professionals. People were also worried whether these professionals have the bandwidth and competence. Some of those questions have been answered, but some remain. Coming to the law, it is a learning process for everyone. If you look at any other country — Europe, the US, the UK had several amendments in the last three decades. The US had over 300-400 amendments! You can’t leave a law static in the present environment. As practical difficulties and roadblocks come up, you have to be dynamic and step in. In that sense, the government has done a very good job. The ordinance caters to our specific requirements.
What does the government’s bankruptcy ordinance achieve?
There is a sense of urgency in the 12 largest accounts that form 25% of our NPAs. The bids (for the companies) are due by month-end. The main thing the ordinance conveys is, if you are a defaulter or have violated laws, you can’t be part of the resolution process. We are looking for a good management to take over.
Is it a correct move to bar the promoters?
Not many countries have so many promoter-controlled or owned companies. Looking at the circumstances. They have done what they feel is best for the country and the banking system. A committee has been formed to look into the amendments. Given how fast they move, they will come up with something in six months. There will be more amendments as many aspects need changes, to make the process even more efficient and productive.
What needs to be changed to make the process more robust?
There is an interplay of other laws with this law. Some tax issues which the government is aware need to be taken care of else the bid price will come down due to taxes and it’s a substantial amount. In some ways, for the government, it’s from one pocket to the other. If the bid price falls then banks will have to take more haircut, then the government will write a bigger cheque for banks. On the other hand, if they forego the tax, that goes entirely to the banks. They will have to make a choice. Similarly, for stamp duty, it’s more complicated since states are involved.
There was a clarification recently from the MCA on whether shareholders’ approval is required on resolution plans.
Similarly, there are some issues related to Sebi, licences, permits and environment clearances. The whole idea here is to have a ‘going concern’. The operations must continue so that value of the enterprise is maximised and banks get a good recovery. The good thing is they are aware of these and we need to find solutions.
Some are calling for suspension of trading companies that are referred to NCLT?
There is a debate should trading be suspended. Share prices of some of these companies have gone up. Regarding Sebi, I feel you don’t need to pamper the market. After all, Sebi’s remit is to protect minority investors. The expert view is that if the debt is getting a haircut, how can equity get any value? But, the feeling is that there could be a long-term bounce-back with a change in management. Therefore, the share price is rising. They are doing with their eyes open. You don’t have to second guess them.
With many cases moving from DRT to NCLT, does the NCLT have the infrastructure support to handle them? What can be done?
Will infrastructure have to be beefed up? Maybe. Special bankruptcy benches will definitely be useful. The key essence from the law drafters was this (NCLT) is not a recovery mechanism. For recovery, there is DRT, Sarfaesi etc. However, Supreme Court in three instances has allowed settlements. It’s a dangerous situation if this becomes a recovery medium. NCLT is a resolution, and not a recovery mechanism. That was not the idea at all.
In NCLT-Jaypee process, homebuyers asked to be treated as ‘creditors’. Did the Supreme Court do the right thing by encouraging homeowners to get into this?
Homebuyers definitely have a claim. We have to protect their rights. We have two kinds of creditors – operational and financial. There were cases where they were accepted as financial creditors. Now that there is RERA, you have to read with it. A clarification is needed on this and there will be something on this in amendments.
While framing laws do you think only from creditors’ side? Should wilful defaulters be thought about too?
We think from all sides. Many people say, this Rs 1 lakh-default mark (after which the insolvency code is triggered), is ridiculously low, There was some discussion on whether the threshold amount be increased. Will it be used as a threatening tool and so on…
Is there a case to really increase that limit from Rs 1 lakh as a proportion of revenue?
I don’t think so. The discussion is from Rs 1 lakh up to Rs 1 crore. Our rationale is that 80% of India has SMEs in terms of GDP and employment. Those guys wouldn’t even get an appointment. Within IBC also, you have two weeks from the date of filing till the case is admitted. In those two weeks, we aren’t saying don’t settle it. If a small company pays you that’s fine. All I’m saying is once a case is admitted it becomes a representative action for everyone.
People argue that in the US chapter 11, companies have been for 3-4 years and it is done in ‘debtor in possession’ style. Why didn’t we go for that?
We didn’t follow the US because we don’t want ‘debtor in possession’. In many cases, there was mismanagement. In other cases, there were genuine business and cyclical issues. You don’t want this mismanagement to continue. In the US, courts also have a big role to play. In India, we tried to make it process-driven so courts have to only check if the law is followed.