Ourview For­ti­fy­ing the in­sol­vency res­o­lu­tion frame­work

Mint ST - - VIEWS -

The com­mit­tee of cred­i­tors will now ex­plic­itly look at the cred­i­bil­ity

The In­dian bank­ing sys­tem is strug­gling with a del­uge of bad debt. At the end of the last fi­nan­cial year, to­tal stressed as­sets—in­clud­ing non-per­form­ing and re­struc­tured as­sets—were es­ti­mated to be at over 12% of ad­vances. In June, the Re­serve Bank of In­dia di­rected banks to start pro­ceed­ings un­der the In­sol­vency and Bank­ruptcy Code (IBC) in 12 large ac­counts. As re­ported by this news­pa­per, the bank­ing reg­u­la­tor has also asked banks to ini­ti­ate the in­sol­vency pro­ce­dure in an­other set of at least 28 ac­counts if they don’t get re­solved in the given time frame (goo.gl/bvy82v).

The im­ple­men­ta­tion of the IBC has been one of the most im­por­tant re­forms in re­cent years. Banks and other cred­i­tors can now take the de­fault­ing com­pany to the Na­tional Com­pany Law Tri­bunal to ini­ti­ate in­sol­vency pro­ceed­ings. There is now a real chance that pro­mot­ers can lose con­trol and are no longer in a po­si­tion to take cred­i­tors for a ride. Last week, in order to fur­ther strengthen the frame­work, the In­sol­vency and Bank­ruptcy Board of In­dia amended the cor­po­rate in­sol­vency res­o­lu­tion process. The res­o­lu­tion plan will now have de­tails, such as whether the ap­pli­cant or other con­nected per­sons have been con­victed for any of­fence in the pre­ced­ing five years; or have been dis­qual­i­fied to act as a di­rec­tor un­der the Com­pa­nies Act, 2013; or have had any trans­ac­tions with the debtor in the pre­ced­ing two years. The re­vi­sion in reg­u­la­tion now makes “it in­cum­bent upon the res­o­lu­tion pro­fes­sional to en­sure that the res­o­lu­tion plan pre­sented to the com­mit­tee of cred­i­tors con­tains rel­e­vant de­tails to as­sess the cred­i­bil­ity of the res­o­lu­tion ap­pli­cants”.

The ba­sic idea is that with more in­for­ma­tion about res­o­lu­tion ap­pli­cants at their dis­posal, the com­mit­tee of cred­i­tors will be bet­ter placed to take a more pru­dent de­ci­sion. How­ever, the amend­ments are likely to make it more dif­fi­cult for pro­mot­ers to re­gain con­trol. For ex­am­ple, among the on­go­ing cases, Es­sar Group is re­ported to have submitted an ex­pres­sion of in­ter­est for Es­sar

Steel. Since the scope of eval­u­a­tion has been broad­ened and, among other things, the com­mit­tee of cred­i­tors will now also ex­plic­itly look at the cred­i­bil­ity and cred­it­wor­thi­ness of ap­pli­cants, the fact that ex­ist­ing pro­mot­ers were in com­mand when the com­pany de­faulted is likely to work against them.

It is of­ten ob­served that de­te­ri­o­ra­tion in com­pany fi­nances doesn’t nec­es­sar­ily af­fect the pro­moter’s fi­nan­cial well-be­ing. There­fore, it is pos­si­ble that in order to re­gain con­trol, pro­mot­ers would be will­ing to put funds on the ta­ble in re­turn for a sig­nif­i­cant re­duc­tion in debt. But this will now be­come dif­fi­cult. Dif­fer­ently put, go­ing by the reg­u­la­tory de­sign, pro­mot­ers would not be in a po­si­tion to game the sys­tem any more. Lenders may not be will­ing to hand the com­pany back to the same pro­mot­ers who could not man­age the busi­ness in the first place. This is not to sug­gest that all pro­mot­ers work with ill in­ten­tions or are in­ef­fi­cient. It is pos­si­ble that a com­pany landed in fi­nan­cial dif­fi­culty be­cause of reg­u­la­tory is­sues or an un­fore­see­able change in the busi­ness en­vi­ron­ment. While the changes are likely to make the in­sol­vency res­o­lu­tion process more ro­bust and trans­par­ent, they would in­crease the pres­sure on the res­o­lu­tion pro­fes­sional as the en­tire process is time bound.

How­ever, over­all ef­fi­ciency of out­comes will also de­pend on how freely bankers in the pub­lic sec­tor are able to take de­ci­sions. One of the rea­sons why they have not been able to ad­dress the is­sue of bad debt in a mean­ing­ful way till now is be­cause of the fear of in­ves­tiga­tive agen­cies in case of a large hair­cut. Al­though it looks un­likely that they will face sim­i­lar prob­lems un­der the in­sol­vency process as the res­o­lu­tion plan will be ap­proved by a com­mit­tee of cred­i­tors and ac­cepted by the ad­ju­di­cat­ing au­thor­ity, it still re­mains to be seen if pub­lic sec­tor bankers will be con­fi­dent enough to take bold de­ci­sions.

Over­all, the changes will make the in­sol­vency res­o­lu­tion process more ro­bust and make things dif­fi­cult for un­scrupu­lous pro­mot­ers. At a broader level, while the IBC will now be ad­dress­ing the res­o­lu­tion part of stressed as­sets, and ef­forts are be­ing made to strengthen the frame­work, In­dian pol­i­cy­mak­ers now also have an op­por­tu­nity to work to­wards min­i­miz­ing the ori­gin of bad loans. The gov­ern­ment is work­ing on a mas­sive Rs2.11 tril­lion bank re­cap­i­tal­iza­tion plan. It will be im­por­tant that cap­i­tal find a way to more ef­fi­cient banks and be ac­com­pa­nied by struc­tural re­forms. Reck­less lend­ing by banks was one of the sig­nif­i­cant rea­sons for the ac­cu­mu­la­tion of bad debt in the sys­tem. Pub­lic sec­tor banks should have the ca­pa­bil­ity to prop­erly eval­u­ate risks in lend­ing to a par­tic­u­lar com­pany. This will re­duce pres­sure on the sys­tem at the ag­gre­gate level.

Bet­ter lend­ing stan­dards and a ro­bust mech­a­nism to ad­dress in­sol­vency will lead to bet­ter al­lo­ca­tion of cap­i­tal and help aug­ment growth in the medium to long run.

Will im­prove­ment in the in­sol­vency res­o­lu­tion frame­work lead to bet­ter al­lo­ca­tion of cap­i­tal? Tell us at views@livemint.com

JAYACHANDRAN/MINT

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