Since the Insolvency and Bankruptcy Code (IBC) came into effect about a year ago, one refrain has been the lack of progress on resolutions. This is simply not true. Despite the perception of it getting stuck in legal quagmires, such as those involving Binani Cement, Electrosteel and Essar, IBC has emerged as a powerful tool for bankers and regulators to tackle the serious problem of stressed assets.
Resolutions deal with assets worth thousands of crores of rupees. In this scenario, a standard one-size-fits-all approach won’t work. Some amount of customisation and optimisation, specific to each case, is needed to make the process viable in the long run. This will take time.
If this means using the entire 270-day time period, instead of rushing through a solution in 150 days to pander to demands for ‘faster resolution’, then it is time well-spent.
Some concerns around IBC’s expected recovery levels also linger. However, historical recovery levels have been abysmally low, cutting across resolution mechanisms. IBC is expected to set a much higher standard. A20% increase in stressed asset prices is the least that is expected. The results are already visible in cases like Binani, where the bids covered most of the debt due to creditors. That being said, it will take time to create an effective price discovery mechanism and an efficient market.
The recommendations of the Insolvency Law Committee (ILC), especially in terms of enhancing the bidder pool, will play a major role in this aspect. Once established, valuations could be enhanced even more. There will, obviously, be cases where the liquidation value is much lower and, hence, recoveries subdued.
But as long as the asset is in good, operating condition, IBC should extract good value from insolvency cases. There has been a spate of bankruptcy-related reforms over the last three decades. However, they have all failed.
IBC has tried to address the problems by not only combining the best aspects of all existing regulations, but also making alterations where required. The core problems for all stressed asset regulations have revolved around a few key issues: timelines of the resolution process, enforceability of the decisions, and the value that can be obtained. These have been addressed by IBC.
Additionally, GoI and regulators, especially the Insolvency and Bankruptcy Board of India (IBBI), have been very proactive in ensuring that any issues seen in the first 12 months are rectified by constituting the The Insolvency Law Committee (ILC)
In early April, the committee submitted its recommendations to the finance minister. These include initiatives pertaining to treating homebuyers as financial creditors, expanding the pool of potential bidders, making recoveries easier for lenders and expediting creditors’ decision-making process.
Once these and more suggested measures are in play, IBC should be even more effective. While IBC’s initial progress was slow, it has seen significant traction in the last few months. Teething problems were always expected. But the regulator and GoI have been steadfast in IBC’s commitment. As long as we give it enough time to evolve, IBC will deliver.
The writer is president, Federation of Indian Chambers of Commerce and Industry (Ficci)
via IBC will deliver but it needs time