Fixing the Bankruptcy Code
It has not given bankers the realisations they had hoped for. Now the government has unveiled a new approach even while they are modifying the act.
- Aug 6, 2018,
- Updated Aug 8, 2018 6:40 PM IST
Two years ago, the landmark Insolvency and Bankruptcy Code (IBC) appeared to have handed a silver bullet to bankers for a quick resolution of the vexed problem of stressed loans. The Act did manage to create a sense of fear among corporate defaulters, but failed to maximise the value of assets for creditors and achieve a time-bound resolution. While it is too short a period to jump to any conclusions, the government changed track a few days ago by giving the green signal to a new five-pronged approach under "Project Sashakt" (or Empowerment). Under this, the government wants to set up one Asset Management Company (AMC) -- a Bad Bank in common parlance, which would take over the stressed assets first, and try and nurse them to health. (Later there could be more AMCs) In one stroke, the government seems to have relegated the IBC, making it a resolution tool of last resort.
The new five-tier resolution structure lists the IBC at fourth place. The first three approaches are outside the IBC and essentially entail dividing the Rs 8 lakh crore plus stressed loans into three different buckets - SME, mid-size and large loans. The fifth resolution tool is actually far more ambitious and is about creating a trading platform for bad loans.
Shyam Srinivasan , CEO, Federal Bank, says IBC is the anchor for resolution of bad loans. "Everything else ( AMC, ARC, etc.) is the additional support or enabler for IBC. The bankruptcy code will stabilise in due course," hopes Srinivasan. "Financial creditors can use the NCLT (National Company Law Tribunal) as a medium but not as the only option," says Abizer Diwanji, Financial Services Head, EY India. Abizer's EY provided support to Project Sashakt from structuring, taxation and accounting perspective. The new approach hints that assets with limited turnaround potential will be taken to the IBC.
So, what has made the government to dilute IBC in a short period of two years? A year ago, when the Reserve Bank of India (RBI) sent packing some of the biggest defaulters, from Ruias of Essar Group to Gaurs of Jaypee Group, the atmosphere was electric. The new code was seen as a harbinger of change for the banking system. But, clearly, the dozen large and complex cases tested the new legislation. The government had to push through two back-to-back amendments. There will be more going forward. But the most litigious amendment has been about debarring defaulting promoters from bidding for their own assets. Similarly, the inclusion of home buyers as financial creditors will have much wider ramifications for banks' future lending to builders and developers.
A few large assets have reached the finishing line but not without challenges. For example, the successful resolution of Bhushan Steel, where Tata Steel has been victorious, has been challenged by operational creditor L&T. In another successful case of Electrosteel Steels, Renaissance Steel challenged the eligibility of the winner, Anil Agarwal's Vedanta. In the case of Binani Cement, the promoters came back offering a higher bid than offered by the bidders. The IBC regulations are either silent or rigid on many of the new situations. For the government, it is becoming tough to fix a code while it is operational. But more than that, the IBC deadlines are getting breached, which doesn't send a good signal to foreign distressed funds or strategic investors.
The bankers are not happy and have ended up taking the maximum haircut. For example, banks took a 60 per cent haircut in Electrosteel, 75 per cent in Monnet Ispat, 84 per cent in Alok Industries and 92 per cent in Adhunik Metaliks. Recently, NCLT sent Jyoti Structures for liquidation. There are already 145 liquidation cases, including voluntary liquidation. Liquidation of a company means loss of employment and productive assets.
IBC has actually failed on two counts - time-bound resolution and maximisation of value. It is beyond doubt that there are very few early successes of IBC. Recently, some experts have raised doubts on IBC emerging as a solution for India's `14 lakh crore bad loan problem. Indeed, the first dozen cases under IBC are yet to be resolved. So far, only four are out of NCLT. There are already 29 more in the second list, which includes Videocon, IVRCL, Uttam Galva, etc. By September, at least 70 more cases are likely to land at the NCLT for resolution. There is already a backlog of thousand cases. "The track record of successful resolution isn't inspiring," says a global distressed fund manager.
Consequently, the bankers lobbied hard with government against the rigid IBC framework as they were at the receiving end - higher provisioning (almost 50 per cent), lower profitability and losses and more and more capital requirement. The bankers have now got a temporary reprieve under Project Sashakt. Now they have to deliver.
While the IBC appears to be here to stay, it is still in an evolutionary phase. The bigger challenge is to fix the IBC as and when hurdles come in the way. There are broadly four areas where the law needs attention.
Two years ago, the landmark Insolvency and Bankruptcy Code (IBC) appeared to have handed a silver bullet to bankers for a quick resolution of the vexed problem of stressed loans. The Act did manage to create a sense of fear among corporate defaulters, but failed to maximise the value of assets for creditors and achieve a time-bound resolution. While it is too short a period to jump to any conclusions, the government changed track a few days ago by giving the green signal to a new five-pronged approach under "Project Sashakt" (or Empowerment). Under this, the government wants to set up one Asset Management Company (AMC) -- a Bad Bank in common parlance, which would take over the stressed assets first, and try and nurse them to health. (Later there could be more AMCs) In one stroke, the government seems to have relegated the IBC, making it a resolution tool of last resort.
The new five-tier resolution structure lists the IBC at fourth place. The first three approaches are outside the IBC and essentially entail dividing the Rs 8 lakh crore plus stressed loans into three different buckets - SME, mid-size and large loans. The fifth resolution tool is actually far more ambitious and is about creating a trading platform for bad loans.
Shyam Srinivasan , CEO, Federal Bank, says IBC is the anchor for resolution of bad loans. "Everything else ( AMC, ARC, etc.) is the additional support or enabler for IBC. The bankruptcy code will stabilise in due course," hopes Srinivasan. "Financial creditors can use the NCLT (National Company Law Tribunal) as a medium but not as the only option," says Abizer Diwanji, Financial Services Head, EY India. Abizer's EY provided support to Project Sashakt from structuring, taxation and accounting perspective. The new approach hints that assets with limited turnaround potential will be taken to the IBC.
So, what has made the government to dilute IBC in a short period of two years? A year ago, when the Reserve Bank of India (RBI) sent packing some of the biggest defaulters, from Ruias of Essar Group to Gaurs of Jaypee Group, the atmosphere was electric. The new code was seen as a harbinger of change for the banking system. But, clearly, the dozen large and complex cases tested the new legislation. The government had to push through two back-to-back amendments. There will be more going forward. But the most litigious amendment has been about debarring defaulting promoters from bidding for their own assets. Similarly, the inclusion of home buyers as financial creditors will have much wider ramifications for banks' future lending to builders and developers.
A few large assets have reached the finishing line but not without challenges. For example, the successful resolution of Bhushan Steel, where Tata Steel has been victorious, has been challenged by operational creditor L&T. In another successful case of Electrosteel Steels, Renaissance Steel challenged the eligibility of the winner, Anil Agarwal's Vedanta. In the case of Binani Cement, the promoters came back offering a higher bid than offered by the bidders. The IBC regulations are either silent or rigid on many of the new situations. For the government, it is becoming tough to fix a code while it is operational. But more than that, the IBC deadlines are getting breached, which doesn't send a good signal to foreign distressed funds or strategic investors.
The bankers are not happy and have ended up taking the maximum haircut. For example, banks took a 60 per cent haircut in Electrosteel, 75 per cent in Monnet Ispat, 84 per cent in Alok Industries and 92 per cent in Adhunik Metaliks. Recently, NCLT sent Jyoti Structures for liquidation. There are already 145 liquidation cases, including voluntary liquidation. Liquidation of a company means loss of employment and productive assets.
IBC has actually failed on two counts - time-bound resolution and maximisation of value. It is beyond doubt that there are very few early successes of IBC. Recently, some experts have raised doubts on IBC emerging as a solution for India's `14 lakh crore bad loan problem. Indeed, the first dozen cases under IBC are yet to be resolved. So far, only four are out of NCLT. There are already 29 more in the second list, which includes Videocon, IVRCL, Uttam Galva, etc. By September, at least 70 more cases are likely to land at the NCLT for resolution. There is already a backlog of thousand cases. "The track record of successful resolution isn't inspiring," says a global distressed fund manager.
Consequently, the bankers lobbied hard with government against the rigid IBC framework as they were at the receiving end - higher provisioning (almost 50 per cent), lower profitability and losses and more and more capital requirement. The bankers have now got a temporary reprieve under Project Sashakt. Now they have to deliver.
While the IBC appears to be here to stay, it is still in an evolutionary phase. The bigger challenge is to fix the IBC as and when hurdles come in the way. There are broadly four areas where the law needs attention.