Govt mulls resolution plan revamp
AS PER IBBI DATA, IN OVER 363 MAJOR NCLT RESOLUTIONS SINCE 2017, BANKS HAVE TAKEN AN AVERAGE HAIRCUT OF 80%
NEW DELHI: The government is considering objective and transparent guidelines for committee of creditors (Coc)—mainly banks and financial institutions—signing off on resolution plans under India’s bankruptcy code, after some excessive haircuts agreed to by such Cocs were questioned by the National Company Law Tribunal and even a parliamentary panel, two people familiar with the matter said.
According to the two, who asked not to be named, there are legitimate concerns that need to be addressed especially in the light of the recent NCLT verdict in the matter of Shiva Industries and Holdings Ltd. COC, made up of financial creditors, is the supreme decision-making body in the corporate insolvency resolution process (CIRP).
NCLT, Chennai, on August 12 rejected a one-time settlement (OTS) agreed between the erstwhile promoters of Siva Industries and its lenders and ordered liquidation of the company. In April, IDBI Bank-led lenders, who made up the COC, discussed and approved a proposal of Siva
Industries where creditors agreed to take a 93.25% haircut to settle dues of ₹4,863.87 crore. That means the banks would have recovered only ₹328.21 crore.
As per Insolvency and Bankruptcy Board of India (IBBI) data, in over 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80%. Some of the large haircuts include Deccan Chronicle (95%), Lanco Infra (88%), Ushdev International (94%) and Zion Steel (99%), the report said.
The people mentioned above said that since COC comprises financial creditors who are often banks and financial institutions that are regulated by the department of financial services (DFS) and the Reserve Bank of India (RBI), one of these could frame guidelines for them.
The ministries of finance and corporate affairs, RBI and DFS did not respond to an email query on this matter.
“Banks must follow some guidelines so that they cannot take arbitrary decisions in the name of commercial wisdom such as negotiating a settlement with absconding promoters of Sterling Biotech. Thankfully, this was rejected by NCLT. If promoters are absconding, how can banks get access to them?” one of the two person asked.
His reference was to a rejected OTS proposal related to Sterling Biotech where COC settled for a 64% haircut of over ₹9,000 crore due with the promoters, who were absconding.
“The verdict, in the case of Shiva Industries, also implied that ‘commercial wisdom’ of the COC cannot be absolute,” the second person said, citing NCLT’S August 12 order. It said, “There is always a system of constant checks and balances where there must not be a capricious or arbitrary power given in hands of COC to accept or reject settlement.” HT has reviewed a copy of the order.
A parliamentary panel has also made some suggestions to strengthen the Insolvency and Bankruptcy Code, including having a framework to ensure that commercial decisions of the COC should be more transparent and objective. HT reported the parliamentary panel’s observations on August 4.
“In the Committee’s view, keeping in mind the experience gathered so far, there is an urgent need to have a professional code of conduct for COC, which will define and circumscribe their decisions, as these have larger implications for the efficacy of the Code,” the panel said in its report.
Pavan Kumar Vijay, the founder of legal and corporate advisory firm Corporate Professionals Group, said, “IBC may take time to recover trust but is definitely a viable option. Since it is evolving, so too is the commercial wisdom of the COC .”
Mohit Saraf, founder & managing partner of Saraf & Partners, isn’t convinced
“A new directional code with framework/professional code of conduct for COC will work but a new framework for code of conduct with old prescriptive laws will spell the death knell for resolutions,” he said.