Move will escalate the cost of resolution, reduce recoveries for creditors: Experts
Insolvency regulator IBBI proposes to levy a “regulation fee” of 0.25 per cent on the resolution value of corporate insolvency resolution plans approved under IBC as part of its efforts to shore up finances and reduce dependence on the Centre’s grants-in-aid.
Any such levy, if implemented, would have far-reaching consequences as this additional impost would eventually reduce the net proceeds received by creditors under the resolution plan, say insolvency experts. The proposed “regulation fee” will apply in cases where the amount of the resolution plan exceeds the liquidation value, according to an IBBI discussion paper.
A back of the envelope calculation showed that if the average aggregate corporate insolvency resolution plan approved every year through the IBC is about Rs. 40,000 crore (it has been over this level in the last two years), then the IBBI will end up pocketing at least Rs. 100 crore under this head. This will be a huge windfall for the regulator, which is now recording receipts of about Rs. 5 crore a fiscal, say some insolvency experts. To shore up its finances and reduce its reliance on the Centre’s grants-in-aid, IBBI has come up with a discussion paper that seeks to enhance the fees garnered by the regulator from 8 times (in the case of IPs) to as high as 40 times (in the case of Information Utility).
Body blow for IUs
In what could be a huge blow for information utility (IU), the IBBI has mooted a slab-based structure for the “annual fee”, which will be calculated at 20 per cent of the turnover of IU for revenue up to Rs. 100 crore and 10 per cent beyond this level.
Currently, there is only one registered IU in India—National e-Governance Services Ltd (NeSL).
Insolvency law experts point out that this 20 per cent rate on an IU is disproportionately high and that too is proposed to be levied on the turnover. This is tantamount to a tax and cannot be treated as a “fee”, noted an expert. If this fee were to be implemented on NeSL, then the firm would have very little retained earnings to take care of its future investment needs in IT, expansion, etc., sources said. Many insolvency experts contend that the IBBI proposal to disproportionally increase receipts from IPs, IPEs, and UIs (an estimated hike of 8 to 40 times) could impact their independence, even lead to conflict of interest situations, and there is therefore a need to soften the proposed blow on them. An IU is an information network that stores financial data like borrowings, defaults, and security interests, among others, of firms.
‘On the higher side’
Amit Jajoo, Partner, IndusLaw, said the board certainly has a host of duties and statutory functions under the Code entailing a huge expenditure. However, the proposed fee structure appears to be on the higher side.
“The “regulation fee” of 0.25 per cent is sought to be introduced as one of the mandatory requirements of a resolution plan and would be payable by the resolution applicant if the amount involved is more than the liquidation value. This may have far-reaching consequences as the creditors, in most cases, are prone to taking deep haircuts on the recovery and this additional fee would further reduce the scope of recovery for creditors,” he said.
Shailesh Poria, Partner, Economic Laws Practice, said theproposed regulatory fee will have to be factored in by the Resolution Applicant at the time of submission of the plan. However, it will ultimately impact the net proceeds received by the financial creditors under the resolution plan, Poria said.
Ruby Singh Ahuja, Senior Partner, Karanjawala & Co, said, “It is a welcome proposal which will make IBBI more self-reliant and reduce its dependence on government funds. However, the proposal would escalate the cost of insolvency,” she added.