Inadequate infrastructure continues to impede IBC implementation

Five years since the Reserve Bank of India came out with the "dirty dozen" list, the Insolvency and Bankruptcy Code (IBC) is still being seen as a last resort by lenders, Reserve Bank of India Deputy Governor M Rajeshwar Rao said at the International Research Conference on Insolvency and Bankruptcy at the Indian Institute of Management (Ahmedabad) earlier this month.

“A comprehensive law like the IBC is often viewed as a last resort by the lenders — an avenue that needs to be explored after exhausting all alternatives. However, this view stems from the lack of a comprehensive vision for the future of a beleaguered borrower,” Rao noted.

His observation could not have been timed better, since there is a convergence of opinion that what was envisaged under this architecture has not come to pass.

According to Divyanshu Pandey, partner at S&R Associates, IBC forced banks to adopt a coordinated approach on resolution once an application got admitted. However, with the passing of the years, the delay in admission of applications and time taken by the National Company Law Tribunals (NCLTs) to decide on matters have forced banks to think of insolvency as a last resort.

“Issues like lack of infrastructure and inadequate bench strength in NCLTs will be resolved only over a period of time and not imminently. Further, in the absence of dedicated insolvency courts and till such time the NCLTs are vested with the jurisdiction to look into IBC, Companies Act, and Competition Act matters, timely response from NCLTs seems to be a distant dream,” added Pandey.

A K Tewari, managing director for risk, compliance and stressed assets resolution group at the State Bank of India, said lenders are now coming around to the view that section 29 of the IBC, which prohibits promoters from bidding for their own company, needs more nuance. He also suggested that the pre-pack insolvency arrangement that was given for MSMEs could be made available under certain conditions to large corporations.

Last April, a paper by the Insolvency and Bankruptcy Board of India (IBBI) said the time taken between filing of an insolvency application and its admission increased to 650 days in financial year 2021-22 (FY22) from 468 days in FY21, against the IBC’s timeframe of a mere 14 days. And this is longer than even the stipulated deadline for completion of the Corporate Insolvency Resolution Procedure (CIRP) under the Code. Under the IBC, the CIRP is to be completed within 180 days or within the extended period of 90 days and mandatorily be completed within 330 days — including any extension and the time taken by way of legal proceedings.

Said Nikhil Shah, managing director of Alvarez & Marsal: “Originally, it was planned that there would be 63 NCLT judges (for IBC matters). It is at just over 40. The number of judges has to increase tenfold to handle the number of IBC cases and they should specialise only in IBC cases.” He pointed to a matter of detail that has not received the attention it deserves: “NCLT judges should ideally admit an insolvency application when they receive a certificate that a default has occurred from the information utility, NeSL (or the National E-Governance Services).”

NeSL, the country’s first information utility, is registered with the IBBI under the aegis of the IBC. “Unfortunately, there is a Kolkata High Court order that this mechanism is not in line with the Evidence Act (1872). All that is needed is a simple amendment to this Act,” Shah said.

Another aspect that impacts timelines are challenges against lenders’ decisions in resolution. Nitesh Ranjan, executive director, Union Bank of India, said, while the interpretation of various provisions is under the ambit of judicial authority, the decision of committee of creditors (COC) should be respected in legal fora. This should not be allowed to be challenged by anybody. If this part is taken care of, we can increase the speed of the resolution process, he said.

The RBI’s Financial Stability Report of December said an analysis of 60 corporate debtors resolved under the IBC between September 2019 and September 2021 showed that the sample median recovery rate was 24.7 per cent. And, the longer bad loans remain on banks’ books, the lower is the amount recovered. It was explained that a reduction in the median gap between bad-loan identification and CIRP commencement may have a pronounced effect on ultimate recovery, and that an examination of the one-year transition of substandard and various doubtful categories of large loans shows no meaningful recovery once banking assets are impaired.

“Hence, to the extent that the provisions of the Income Recognition and Asset Classification norms do not incentivise referral for resolution, prospective recovery of assets is impaired since recoveries decline sharply with vintage. This has implications for both state-run and private banks which carry impairments of considerable vintage as well as for bad assets transferred to the National Asset Reconstruction Company,” added the FSR.