The code to unlock the banking stalemate
What started as an important box to tick in the government efforts to improve India’s rankings in the World Bank’s ‘Ease of Doing Business’ report is slowly becoming the most important economic legislation of the country. By referring to it in an ordinance to tackle the problem of nonperforming asset, the finance ministry seems to have offloaded a ~7 lakh crore load on the young shoulders of an emerging framework, based on the Insolvency and Bankruptcy Act, 2016. Often referred to as the Insolvency and Bankruptcy Code or IBC.
The six-month-old regulator just got its wholetime members and a new office. These, and a new breed of professionals, lawyers and the legal system, are still understanding the boundaries and nuances of the code, and the understaffed and overworked National Company Law Tribunal (NCLT). The new system has already hit the ground running.
In the first few months of its operation, the IBC has been invoked in around 450 cases, the sum of debt exceeding ~13,000 crore. The NCLT has so far admitted 30-odd cases and rejected slightly more; the number of cases hitting its benches across the country is growing every day.
At a recent and well attended conference on corporate insolvency, senior lawyer Sumant Batra, who has authored a book on this subject, recounted how the tribunal is housed in a building that also has the headquarters of the Central Industrial Security Force and other forces, and that lawyers and litigants have to undergo repeated frisking and checking. Basic facilities like seating and refreshments are a luxury. When a time-bound approach and professional culture are expected of other stakeholders, one key stakeholder cannot remain frozen in time, lawyers feel. Rightly so.
Companies, banks, asset reconstruction agencies and other stakeholders are trying to find ways to use the code to their advantage. Several special situations have emerged. A Chandigarhbased chartered accountant who has registered himself as an insolvency professional referred to a case which came to him, where the operational creditor had factored in an interest of 36 per cent. The CA said he turned it down. He also spoke of another case, where the company’s debtors were all with entities controlled by a local political figure. “How is the insolvency professional supposed to resolve these?”
In another instance, a company itself moved the NCLT, appointing its own lawyer as the interim resolution professional. But, the banks woke up and got the professional changed.
Though there are noises being made about high courts interfering in the time-bound process, thereby throwing a spanner on the timelines, the regulator seems to feel that interpretation of the various aspects of the new statute is important for it to stand the test of time and earn credibility.
A Supreme Court judge made an astute observation, looking back at the history of resolution processes, that the only cases where restructuring was successful were those which had capital appreciation in realty. The defunct mills of Lower Parel in Mumbai that became the luxury malls of Upper Worli come to mind.
One could also smell a tinge of scepticism. This came from a bureaucrat from a Madhya Pradesh state entity, a large lender. He believed there was nothing wrong with the earlier law, referring to the Sick Industrial Companies Act (SICA). According to him, the people who administered it were responsible for its failure. “Why didn’t they hold the BIFR (Bureau for Industrial and Financial Reconstruction) accountable?” he asked, and predicted a similar failure here.
Conspicuous by their absence in the system are the public sector banks. Even the biggest of them haven’t built internal systems or trained people to handle the demands of the new law. Maybe the ordinance will wake them up.