Bank­ruptcy Code to help deep­en­ing 01 cor­po­rate bond mar­ket: ASSOCHAM-CRISIL study


In­dia's cor­po­rate bond mar­ket which forms 17 per cent of the coun­try's GDP against 123 per cent in the US and 74per cent in South Korea, is highly con­cen­trated in the AAA rated bonds, which may change over time, once the In­sol­vency and Bank­ruptcy Code (!BC) brings about suc­cess­ful res­o­lu­tion of stressed as­set cases in a time bound man­ner, an ASSOCHAM-CRISILjoint study has said. Re­duc­tion in the time­line for res­o­lu­tion of stressed as­sets un­der the !BC would not only en­hance con­fi­dence of in­vestors but would also make them go in for even less than AAA bonds, the study noted. Presently, about 90 per cent of trad­ing is re­stricted to AAA and AA rated cat­e­gories. "With greater cer­tainty of out­come and ex­pec­ta­tions of a faster

res­o­lu­tion be­cause of the mc, the in­ter­est of both do­mes­tic and for­eign in­vestors in low­er­rated pa­per will in­crease over time", it said.

Coun­tries such as Brazil, Rus­sia, China and the UK had taken steps to re­form the bank­ruptcy laws which, along with other gov­ern­ment-spe­cific macroe­co­nomic struc­tural re­forms, led to sig­nif­i­cant growth in the cor­po­rate bond mar­kets in their re­spec­tive fi­nan­cial mar­kets. RBI has im­ple­mented norms for lim­it­ing in­di­vid­ual/ group ex­po­sures in banks, en­cour­ag­ing large cor­po­rate bor­row­ers to ac­cess the bond mar­kets for fund­ing re­quire­ments. "This, along with the Code, will pro­vide a boost to the In­dian bond mar­ket", the study pointed out.

On the role of the As­set Re­con­struc­tion Com­pa­nies (ARCs), the ASSOC HAMCRIS IL study said, a struc­tural shift is ex­pected in the In­dian stressed-as­set mar­ket that would lead to a re­set of busi­ness mod­els in the ARC in­dus­try. ARCs may part­ner

with large funds for in­creas­ing their cap­i­tal base and, hence, may go for large ac­qui­si­tions. At present, de­spite de­cel­er­a­tion in growth, ARCs' As­set Un­der Man­age­ment (AUM) is ex­pected to reach Rs 1 lakh crore by June 2019.

The study ex­pressed con­fi­dence that an ef­fec­tive im­ple­men­ta­tion of the mc can help im­prove the re­cov­ery rate of the stressedas­sets fur­ther, as it has been proven in­ter­na­tion­ally. So far, re­cov­er­ies by ARCs have re­mained below ex­pec­ta­tions as res­o­lu­tions were lengthy. Smaller as­sets (debt up to Rs 100 crore) typ­i­cally have a shorter res­o­lu­tion time frame and bet­ter re­cov­ery rate com­pared with larger ones.

While the sale of as­sets or set­tle­ments is the most pre­ferred and suc­cess­ful strat­egy for small ac­counts, re­con­struc­tion was the most pre­ferred strat­egy for large ac­counts. But large ac­counts, dur­ing re­con­struc­tion, could take a le­gal re­course, de­lay­ing the re­cov­ery pro­ceed­ings. This would re­main a chal­lenge for an ef­fec­tive res­o­lu­tion within the pro­posed time­line. In the long run, ef­fec­tive im­ple­men­ta­tion of the mc will help in pre­serv­ing the value of as­set and faster res­o­lu­tion. That, in turn, means ARCs will be able to churn cap­i­tal faster and en­hance re­turns.

The ac­cess of ARCs to cap­i­tal sources is also crit­i­cal, be­cause their col­lec­tive net worth is just about Rs 4,500 crore (CRISIL es­ti­mates, As on March 31, 2017), and they have a lim­ited room to tackle the present level of NPAs. The new Code, along with a 100per cent FDIin ARCs through the au­to­matic route, is ex­pected to boost cap­i­tal flows. Fur­ther, with the re­cent RBI pro­posal to in­crease ne­towned funds to Rs 100 crore for ARCs, a faster res­o­lu­tion of re­lease of cap­i­tal be­comes more im­por­tant.

For en­trepreneurs or start-ups, wind­ing up a busi­ness re­quires mul­ti­ple ap­provals and leads to a sub­stan­tial de­lay in hon­our­ing the dues of cred­i­tors. The Code will pro­vide some respite, as a start-up firm that gets in­sol­vent can be wound up on a fast-track ba­sis within 90 days. Thus, cred­i­tor in­ter­est can­be­pro­tected and cap­i­tal can be re­al­lo­cated to ef­fi­cient busi­nesses. Also, this will help en­trepreneurs ini­ti­ate in­sol­vency pro­ceed­ings vol­un­tar­ily. Over time, the Code will help pro­mote en­trepreneur­ship and in­crease the role of pro­fes­sion­als from var­i­ous fields such as law, ac­coun­tancy and fi­nance.

While a num­ber of steps have been taken for the im­ple­men­ta­tion of the mc, chal­lenges per­sist at mul­ti­ple lev­els, in­clud­ing in­fras­truc­ture is­sues, in­ter-cred­i­tor con­flicts and lim­ited devel­op­ment of the sec­ondary mar­ket.


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