Few will go on record explicitly, but there is the fear that there will be a logjam ahead on the IBC front.
In a week from now, the one-year breather which held in abeyance the filing of insolvency proceedings will come to an end. Will there be a spate of suits being filed under the Insolvency and Bankruptcy Code (IBC)? The response depends on whom you reach out to.
“It’s unlikely there will be a rush to file applications on resumption of the IBC process. A lot of work on corporate cases has happened in the prior quarters before the pandemic set in,” says J Samuel Joseph, deputy managing director, IDBI Bank, adding for comfort that the bank will refrain from blindly taking stressed asset cases to the National Company Law Tribunal (NCLT).
“In the case of EPC (engineering, procurement and construction) firms, lenders will get very low value through the NCLT, as they do not have assets. Such cases are better resolved outside the NCLT, where the track-record in handling projects is on the basis of the company’s worth. Though IDBI Bank has a potential pipeline of cases for the NCLT route, it’s in single digits,” he adds.
Shyam Srinivasan, managing director and chief executive officer, The Federal Bank, has a slightly different view: “The picture will become clear after the moratorium is lifted and banks start cross-checking with each other.”
Few will go on record explicitly, but there is the fear that there will be a logjam ahead on the IBC front. Cases filed could soar even as the current resolution infrastructure groans. Many believe that Section 29A — which bars defaulting promoters from buying back a company at steep discounts — needs revisiting. It is felt that there could be cases where promoter mismanagement may not be the reason for a default.
No high-fives at five
In June this year, IBC will be five years old. A quick look at the experience so far tells you that the rate of filing of new cases far exceeded the rate of closure — nearly 75 per cent of the 1,942 cases are older than 270 days. The performance of NCLT benches varies: Those in New Delhi and Mumbai (handling the highest number of cases), have a resolution time of more than 475 days — above the national average of 440 days. Those in Kolkata and Bengaluru have better metrics than their peers, with an average resolution time of 339 and 352 days, respectively.
If we are to include the time for appeals beyond the NCLT (to the National Company Law Appellate Tribunal, and the Supreme Court) and subsequent litigation, the time-line for resolution moves up sharply — from 445 days to 775 days, according to a report by Alvarez & Marsal, in its sample of 23 firms.
“The need of the hour is to support IBC by enhancing the judicial infrastructure to take care of the volume of cases that could be filed. NCLTs are already burdened not only with matters other than insolvency, but the rush of anticipated insolvency filings will add to that burden. Delays in disposal of insolvency filings and resolution are likely to trip economic recovery,” notes Divyanshu Pandey, partner at S&R Associates.
Let’s take section 29A. Should it be revisited? After all, the pandemic is an outlier event in world history. And while the lockdown may have kicked in only from mid-February, its effect had started to be felt a month before, at least in some sectors. “It doesn’t seem justified, given that the intent of Section 29A and the effects of extraneous factors linked to Covid-19 were largely neutralised on account of the Reserve Bank of India’s initiatives,” says Nikhil Shah, managing director, Alvarez & Marsal.
Shah adds: “As for the possibility of not having sufficient resolution applicants bid for stressed assets (and the promoter group being the only available bidders), this could be neutralised with the introduction of the pre-pack resolution process.”
Srinivasan is blunt: “You can’t create policy based on outlier cases. You have good enough firms which have fared well during the pandemic.” It’s his way of conveying that keeping the door ajar can let in promoters who had a good time.
There is also a counter view. “Instead of bringing out a new genie out of the bottle every time, like pre-packs, the government and the Insolvency and Bankruptcy Board of India need to go back to the drawing board. Issues like 29A and the effectiveness and relevance of overly prescriptive regulations need to be examined,” explains Pandey. “You see, each case is unique. Given the ironing out of many creases since the introduction of IBC, what is needed is adherence to a basic framework and principles laid down under the Code. Being too prescriptive constrains viable commercial solutions.”
Whichever way you look at it, the performance of the IBC process, going forward, is critical. The RBI’s Financial Stability Report of January 2020 has stated that banks’ gross non-performing assets may rise sharply to 13.5 per cent by September 2021 — nearly double the figure of 7.5 per cent in the same period of 2019-20 — and escalate to 14.8 per cent under the severe stress scenario.
This has implications for state-run banks and their recapitalisation, and can have a bearing on plans for their privatisation. As the RBI’s forbearance measures in the wake of the pandemic are withdrawn, and the interest rate cycle switches, it could all prove to be tricky. Beware the Ides of March.