TeaHere are the concerns that lenders have had to take big to have a haircut On firms that undergo the Corporate Insolvency Resolution Process or CIRP under the Insolvency and Bankruptcy Code or IBC. The disquiet over the short recovery resulted in the National Company Law Appellate Tribunal, or NCLAT, order restart The resolution process of Videocon Industries was completed in January this year.
Revisiting commercial decisions taken by the Committee of Creditors (CoC) adds to the uncertainty in the IBC process. While concerns about low recovery from IBC may be valid, we must revisit how large the haircuts are and examine the factors that drive this result. Recovery improvements are more likely to stem from systematic fixtures to the overall policy environment, as opposed to revisiting individual cases.
importance of business knowledge
The earlier mentioned NCLAT judgment on Videocon ordered the reopening of the resolution plan, which was accepted by the CoC majority, even though only 4.15 per cent of the accepted claims were recovered. It is understandable that the court is concerned with low recoveries. However, this decision seems to be going against the Supreme Court. rulingIn which it was stated that “the Adjudicating Authority or the Appellate Authority cannot sit in appeal on the commercial wisdom of the CoC.”
The decision also appears to be contrary to the IBC, which was intended to reduce the scope of such judicial discretion. Ultimately, what was the alternative to the recovery of 4.15 per cent is a question best understood by the members of the CoC themselves. There may be merit in relying on the business knowledge of stakeholders, even if, in particular cases, it conflicts with our notions of fairness.
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overstating haircuts
We may be exaggerating the effect of the haircut lenders saw at IBC. When a firm runs into trouble and anticipates that it will not be able to repay its loans, it typically seeks to restructure its debt obligations with the lender. A lender makes decisions about the firm’s business on a judgment basis, and this may have an impact on its provisioning. By the time a firm enters the IBC, one can assume that the restructuring process has not worked. While we do not have enough data on whether restructuring has become more effective due to the potential threat of IBC, conversations with industry players suggest that it did.
Another measure of voluntary settlement is evacuation under Section 12A of the Bankruptcy Code. seven hundred and forty out of 5,889 Firms that came under IBC have been withdrawn under 12A, while 552 have headed for resolution plan. Clearly, some voluntary mechanism is working for debtors and creditors, and possibly, the lender is getting a better deal from this settlement than the recovery numbers show.
According to the Insolvency and Bankruptcy Board of India (IBBI), approx. 35 percent of CIRPs As a result the resolution plan was earlier with the Board for Industrial and Financial Reconstruction (BIFR) and/or was inoperative. It is not surprising that creditors cannot recover much from these firms. Potential buyers do not want to invest in a firm which has little or no value as a going concern. The liquidation value of these firms will be even lower. The fact that there were bidders who could see some value in these firms should indeed be celebrated.
On an average, creditors have been able to secure 31 per cent of their claims in the CIRP, which led to the formulation of the resolution plan. This number does not account for recoveries from lenders, either due to better restructuring before the firm entered IBC, or withdrawal under section 12A. This is a fitting outcome for a system that has had to bear the brunt of a legacy of non-performing assets (NPAs).
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due to low recovery
there are several cause for less recovery. Delays in courts have a direct impact on the recovery that banks are able to get from IBC. The more time a firm spends in the process, the more value it loses. The average time taken for closure of IRP is 561 days. The policy focus should be on how these delays can be reduced. A few days back, the Supreme Court had said that only rising judges would be No Improvement in pendency. There is merit in this argument, as there is also a need for procedural reform in the Tribunal.
India’s market is a buyer’s market for distressed firms, and it is possible that these companies are driving a hard bargain. The small size of the market is due to two reasons. First, the distressed debt market is in its nascent stage and will take time to develop. Second, Section 29A of the IBC has resulted in the effective exclusion of the promoters from the bidding process. If we want a better recovery, perhaps we should look for ways to expand the pool of potential buyers and increase competition for these distressed assets. It may be that many insolvent firms should not have been given loans in the first place. However, this cannot be resolved through reforming the IBC. Long-term improvement will only come through systematic correction of all factors contributing to the problem.
The writer is associate professor at the National Institute of Public Finance and Policy (NIPFP). She tweets @resanering. Thoughts are personal.
(Edited by Zoya Bhatti)