Centre mulls new rules on financial resolution plans
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.
According to a Mint report on June 18, India’s bankruptcy resolution system remains marred by meagre recoveries and protracted delays, despite attempts to fine-tune the regime that debuted in 2017. On June 15, NCLT also questioned the extensive haircut (95.85%) that lenders agreed to take in the insolvency resolution of Videocon group companies. The Anil Agarwal-promoted Twin Star Technologies proposed to pay ₹2,962 crore against admitted claims of ₹64,838 crore, implying a 95.85% loss to all Videocon creditors, the report said.
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%.
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. DFS is an arm of the finance ministry.
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.
A parliamentary panel has also made some suggestions to further strengthen the Insolvency and Bankruptcy Code (IBC), including having a framework to ensure that commercial decisions of the COC should be more transparent and objective. All such matters are under consideration, the second person added.
Pavan Kumar Vijay, the founder of legal and corporate advisory firm Corporate Professionals Group, said, “IBC may take some time to recover trust but is definitely a viable option. Since the law is evolving, so too is the commercial wisdom of the COC which definitely requires discipline.” “Banks/fi’s in any case take a long time to decide whether to approve or reject a plan. Some additional discipline if imposed, would further streamline and ease the process of decision making,” he added.