“IL& FS value will be mon­e­tised in eight months”



The Min­istry of Cor­po­rate Af­fairs ( MCA) is in the thick of ac­tion – deal­ing with shell com­pa­nies, cri­sis at IL& FS, putting the fledg­ling in­sol­vency law in place, and much more. MCA Sec­re­tary In­jeti Srini­vas, in a dis­cus­sion with Joe C. Mathew and Di­pak Mon­dal, talks about ini­tia­tives the min­istry has taken in the past one year. Edited ex­cerpts:

Are there con­crete signs that IBC (In­sol­vency and Bank­ruptcy Code) has brought pos­i­tive changes?

IBC marks a par­a­digm shift in the ap­proach to cor­po­rate in­sol­vency. Un­der SICA (Sick In­dus­trial Com­pa­nies Act) or other res­o­lu­tion av­enues avail­able ear­lier, the bor­row­ers con­tin­ued to be in man­age­ment and in con­trol of the cor­po­rate debtor. Un­der IBC, the first ma­jor change is that the con­trol shifts to the cred­i­tor as soon as the cor­po­rate in­sol­vency res­o­lu­tion process (CIRP) be­gins. The cred­i­tor wants early res­o­lu­tion and max­i­mum re­cov­ery.

Due to this shift, the en­tire process has been com­pressed. It is in the cred­i­tor’s in­ter­est to wind up the process as quickly as pos­si­ble. In the SICA regime, the debtor wanted to drag the process in­def­i­nitely to re­tain con­trol and de­lay the dis­charge of re­pay­ment obli­ga­tions.

IBC is the most suc­cess­ful eco­nomic leg­is­la­tion in terms of im­pact­ing the be­hav­iour of the tar­get groups — bor­row­ers as well as cred­i­tors. Even bor­row­ers are now fully con­scious of the fact that if the debt be­comes un­sus­tain­able, they run the risk of los­ing the com­pany. And if you are found guilty of mis­man­age­ment and fraud, you may lose every­thing, as the con­cept of lim­ited li­a­bil­ity will no longer be ap­pli­ca­ble.

How would you rate IBC’s suc­cess so far?

The most im­por­tant mea­sures of qual­ity and ef­fec­tive­ness of any new law are whether it is based on in­ter­na­tional best prac­tices or not, and how ef­fec­tively it has been im­ple­mented. In the past two years, the av­er­age time taken, re­cov­ery ef­fected and cost of res­o­lu­tion un­der IBC have seen a marked im­prove­ment over the pre­vi­ous (res­o­lu­tion) regime.

As per a World Bank re­port, for the past many years, the av­er­age time taken for res­o­lu­tion was 4.3 years, cost of res­o­lu­tion was 9 per cent and av­er­age re­cov­ery was 26 per cent. To­day, in the 63 res­o­lu­tions un­der IBC, the av­er­age time taken has been 268 days. Though it is more than the 180-day nor­mal time limit (which can be ex­tended to 270 days), it is still within a year.

The cost of res­o­lu­tion is less than 1 per cent. In fact, our own un­der­stand­ing is that it is around 0.4 per cent. And the re­cov­ery so far in the 63 cases — both for op­er­a­tional and fi­nan­cial cred­i­tors — is 47-48 per cent.

What are the chal­lenges un­der IBC?

It is a con­sol­i­dated law but there are some chal­lenges. We need to look at in­di­vid­ual and cross-bor­der in­sol­vency, timely dis­posal and more cases re­solved as op­posed to liq­ui­da­tion. Liq­ui­da­tions are far more than res­o­lu­tions. For about 250 cases go­ing for liq­ui­da­tion, there are only about 63 res­o­lu­tions. Ma­jor­ity of the cases liq­ui­dated, may be 70 per cent-plus, were old BIFR (Board for In­dus­trial and Fi­nan­cial Re­con­struc­tion) cases. These are long pend­ing cases and there is no pos­si­bil­ity of res­o­lu­tion be­cause the as­set value has al­most been de­stroyed. The liq­ui­da­tion value of 250-odd cases is hardly 5-7 per cent of claims. Res­o­lu­tion was not re­ally a pos­si­bil­ity.

But now, af­ter the RBI (Re­serve Bank of In­dia) brought in the Fe­bru­ary 12 cir­cu­lar last year (2017), it has be­come im­per­a­tive for banks and fi­nan­cial in­sti­tu­tions to take timely ac­tion. This means that af­ter 180 days of de­fault for big loans, you need to go to IBC if you are not able to put in place a res­o­lu­tion out­side IBC.

If cases come with­out de­lay to IBC, the prob­lem of value de­struc­tion will re­duce and chances of res­o­lu­tion will be very high. Be­havioural changes will pos­i­tively im­pact the bor­row­ing and lend­ing cul­ture, and the twin­bal­ance sheet prob­lem would be ad­dressed to a con­sid­er­able ex­tent at the com­pany and bank level.

You re­cently said IBC should not be the only mech­a­nism to ad­dress non-per­form­ing as­sets (NPAs)…

That is be­cause you can never have a one-size-fit-all so­lu­tion. Al­ter­na­tive meth­ods of re­solv­ing dis­putes should al­ways be en­cour­aged. Though it may be a bit too early at this junc­ture to for­mally in­tro­duce a pre-pack type of ar­range­ment that is preva­lent in the US and the UK, it is cer­tainly a medium-term or long-term goal that even be­fore ini­ti­at­ing the IBC process, we have a res­o­lu­tion frame­work with cred­i­tors’ con­sent and with due re­gard to trans­parency and com­pet­i­tive process.

Doesn’t the cur­rent law pro­vide for this?

The cur­rent law does not talk about pre-IBC res­o­lu­tions, but within the 180-day time frame that RBI has al­lowed, banks can con­sider a pre-IBC kind of res­o­lu­tion, some­thing the re­cently in­tro­duced three-pronged Sashakt scheme aims at. A men­tion in the law is de­sir­able as that will make it le­gally bind­ing and bring in cer­tain rigour to the process. It will also le­gally set­tle the mat­ter be­cause in the pre-pack (ar­range­ment), they come to court and have the stamp of ap­proval. In Sashakt, you don’t

come to court, you set­tle it out­side. A pre-pack ar­range­ment is de­sir­able but not with­out trans­parency, com­pe­ti­tion and rigour. If there are re­lated-party set­tle­ments, there should be ad­e­quate checks. It should not sub­vert the de­sired out­come. Maybe we have to wait for a cou­ple of years be­fore we can in­tro­duce a pre-pack type of al­ter­na­tive.

In a cou­ple of cases, com­pa­nies that suc­cess­fully bid for as­sets un­der IBC are not pay­ing cred­i­tors. What will you do about them?

The sys­tem should be ro­bust enough to not en­ter­tain non-se­ri­ous bid­ders. With some cases in front of us, it ap­pears some peo­ple are try­ing to game the sys­tem. The law has some checks and bal­ances but those cater to ex­treme sit­u­a­tions. For ex­am­ple, the law has a pro­vi­sion of im­pris­on­ment as well as mon­e­tary penal­ties for en­ti­ties that try to fraud­u­lently game the sys­tem. But those are ex­treme sit­u­a­tions.

In the CIRP process it­self you have to build in rigour in terms of earnest money or se­cu­rity de­posits to elim­i­nate non-se­ri­ous bid­ders or have — I don’t know how easy it would be — some back­ground checks.

How ro­bust is the MCA21 data? How far has the clean­ing of in­ac­tive ac­counts reached?

MCA21 has ex­isted for a lit­tle over a decade and it is one of the most com­pre­hen­sive plat­forms we have, even at an in­ter­na­tional level. (MCA21 is an e-gov­er­nance ini­tia­tive for speedy de­liv­ery of ser­vices and reg­u­la­tion of cor­po­rate com­pli­ance us­ing in­for­ma­tion tech­nol­ogy). But there has been a prob­lem of data re­li­a­bil­ity due to poor qual­ity of re­port­ing. That has been ad­dressed to an ex­tent and is con­tin­u­ously be­ing ad­dressed. We feel that in Ver­sion 3 (of MCA21), it will be ad­dressed fully. Ver­sion 3 would ef­fec­tively take two years to be­come op­er­a­tional. We have hun­dred per cent re­li­able data on di­rec­tors. We had 3.3 mil­lion di­rec­tors on MCA21. Af­ter run­ning an ex­haus­tive KYC (process), to­day we have 1.6 mil­lion di­rec­tors, with com­plete, ver­i­fied in­for­ma­tion on each of them. So, 1.7 mil­lion (di­rec­tors) are now de­ac­ti­vated, which, at the first level of as­sess­ment, ap­pears to rep­re­sent dummy and non-ex­is­tent di­rec­tors or di­rec­tors with some prob­lem.

This data of dummy di­rec­tors pro­vides an in­valu­able lead; now we can track the com­pa­nies in which they are di­rec­tors and then track the com­pli­ance be­hav­iour of those com­pa­nies. MCA21 is per­fectly ca­pa­ble of run­ning this data an­a­lyt­ics. We were in the process of run­ning KYC on 1.2 mil­lion com­pa­nies as well. Sim­i­larly, we will run KYC on pro­fes­sion­als (char­tered ac­coun­tants, cost ac­coun­tants and com­pany sec­re­taries) who en­gage with MCA21 on be­half of com­pa­nies they rep­re­sent.

What is the sta­tus of the in­ves­ti­ga­tions into shell com­pa­nies?

Even in the UK, where there are 10 mil­lion com­pa­nies reg­is­tered, only 4.5 mil­lion are ac­tive. We have 1.7 mil­lion com­pa­nies, of which 1.1 mil­lion are ac­tive. But only around 60 per cent of ac­tive com­pa­nies are com­pli­ant with the com­pa­nies law in terms of re­port­ing obli­ga­tions. We are re­mov­ing the names of in­ac­tive com­pa­nies — some­times we re­fer to them as shell com­pa­nies — from the Regis­trar of Com­pa­nies. Once re­moved, for the pur­pose of the Com­pa­nies Act, they do not ex­ist, ex­cept if there are in­di­vid­ual li­a­bil­i­ties of di­rec­tors, in which case pro­ceed­ings against them will con­tinue.

Al­most 500,000 in­ac­tive com­pa­nies have been iden­ti­fied in the process of dereg­is­tra­tion. In the first drive, 226,000 were dereg­is­tered; in the se­cond drive, 105,000. The process con­tin­ues.

MCA was in­ves­ti­gat­ing com­pa­nies that had de­posited large sums of cash dur­ing de­mon­eti­sa­tion. What has hap­pened to those cases?

Post-de­mon­eti­sa­tion, it was seen that some com­pa­nies had de­posited ab­nor­mally (large sums) and sub­se­quently with­drawn money. Around 68 such com­pa­nies were iden­ti­fied and put un-



der in­ves­ti­ga­tion. The in­ves­ti­ga­tion is go­ing on. In some cases, it has come out that there was no wrong­do­ing. The prob­lem oc­curred be­cause the com­pany had re­lo­cated but the bank ac­count still op­er­ated with the orig­i­nal CIN (Cor­po­rate Iden­ti­fi­ca­tion Num­ber), which is now a de­funct com­pany. So the sys­tem alerted that a de­funct com­pany was do­ing so many cash trans­ac­tions.

Some com­pa­nies, how­ever, found it dif­fi­cult to ex­plain how so many trans­ac­tions had taken place with­out any overt busi­ness ac­tiv­i­ties. In­ves­ti­ga­tions into those com­pa­nies are go­ing on. In some cases, pros­e­cu­tions have been launched.

In IL&FS, what were the ba­sic cor­po­rate gov­er­nance is­sues ex­posed?

IL&FS failed on all counts. The board, in­clud­ing in­de­pen­dent di­rec­tors, failed in dis­charg­ing its fidu­ciary du­ties; the man­age­ment failed in man­ag­ing the com­pany; the statu­tory au­di­tors failed in au­dit­ing prop­erly. Even credit rat­ing agen­cies were not been able to smell a rat. There were is­sues with fi­nan­cial reg­u­la­tors too. Any­way, now that the gov­ern­ment has stepped in and ap­pointed a new board of di­rec­tors, as we pro­ceed we will get a pic­ture of the quan­tum of mis­man­age­ment. An SFIO (Se­ri­ous Fraud In­ves­ti­ga­tion Of­fice) in­ves­ti­ga­tion is also un­der way. But it is es­tab­lished that cor­po­rate gov­er­nance failed and there was to­tal mis­man­age­ment.

What is the lat­est up­date on IL&FS?

It (the com­pany) is broadly mov­ing as per the roadmap set by the new board which has been shared with NCLT (Na­tional Com­pany Law Tri­bunal) and the gov­ern­ment. On mon­eti­sa­tion, we have in­formed NCLT that in the en­tire group of over 300 com­pa­nies, there are some that have value, some don’t have any value, and some are sticky. So, nat­u­rally the ones that are more liq­uid, more amenable to res­o­lu­tion will be put on sale through a trans­par­ent com­pet­i­tive process. With the con­sent of cred­i­tors, we ex­pect that res­o­lu­tion plans will be fi­nalised and placed be­fore the tri­bunal for ap­proval. We should try and bring some sort of fi­nal­ity in eight months or so. There­after, set­tling resid­ual is­sues will take a lit­tle more time. But what­ever value is there, that will be pre­served and mon­e­tised in the next eight months or so.

Com­pa­nies had to dis­closede­tails of sig­nif­i­cant ben­e­fi­cial own­ers. Have those dis­clo­sures started com­ing?

Not yet. Though we had no­ti­fied the rules, a lot of queries were re­ceived, and some am­bi­gu­i­ties were pointed out. So, the min­istry has kept it in abeyance. Now we are on the verge of putting out the re­vised rules and forms, maybe in a cou­ple of weeks or so.

Will the thresh­old re­main 10 per cent?

The thresh­old will re­main at 10 per cent. Some is­sues were raised. Di­rect and in­di­rect hold­ing, hold­ing ver­sus con­trol… How to de­ter­mine con­trol, based just on vot­ing power or the num­ber of shares you hold? Or whether con­trol can be ex­er­cised even with­out that? How to re­port it? How will it come in an e-form? There were also re­quests for ex­emp­tions. As you are aware, we have ex­empted a few en­ti­ties such as mu­tual funds, REITs and In­vITs reg­u­lated by Sebi (Se­cu­ri­ties and Ex­change Board of In­dia) from such re­port­ing obli­ga­tions.

Are we equipped to han­dle anti-com­pet­i­tive prac­tices in a new econ­omy?

The new econ­omy chal­lenges are not pe­cu­liar to In­dia, it is a world-wide phe­nom­e­non. A com­pe­ti­tion law re­view com­mit­tee has been set up to re­view the ex­ist­ing law. It is a broad-based com­mit­tee with law firms, ex­perts, reg­u­la­tors and other em­i­nent per­sons. The com­mit­tee has set up dif­fer­ent work­ing groups to look at spe­cific is­sues. One of those re­lates to chal­lenges thrown up by the new econ­omy — dis­rup­tive tech­nol­ogy, dig­i­tal tech­nol­ogy chal­lenges, def­i­ni­tion of mar­ket and rel­e­vant mar­ket, de­ter­min­ing dom­i­nance, deep dis­counts, what is un­fair prac­tice… all that is be­ing dis­cussed.

When can we ex­pect in­di­vid­ual in­sol­vency cases to be taken up?

In­di­vid­ual in­sol­vency will be taken up soon. In the first phase, per­sonal guar­an­tor to the cor­po­rate debtor will be taken up; this should start in the next two months or so. Af­ter that, part­ner­ship, pro­pri­etor­ship, and other in­di­vid­u­als will be taken up.


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