Insolvency pangs: More transparency and tweaking of the IBC will help

Of the 12 indebted companies that were referred to the NCLT, for resolution under IBC, two - Bhushan Steel and Amtek Auto - have found buyers in Tata Steel and Liberty House, respectively

The Insolvency and Bankruptcy Code, or IBC, has made some smart progress towards reconciling India’s humongous bad debt problem. Of the 12 indebted companies that were referred to the National Company Law Tribunal, or NCLT, for resolution under the IBC, two — Bhushan Steel and Amtek Auto — have found buyers in Tata Steel and Liberty House, respectively. Another six companies are awaiting bidder selection, which is expected by early next month. Given India’s traditionally labyrinthine processes, this is decent progress in the space of five months from the initial NCLT reference. It is axiomatic that this momentum, in turn, will be determined by robust processes but also by the competence of resolution professionals, who need to be licensed after passing an exam mandated by the Insolvency and Bankruptcy Board of India, or IBBI. Recent events have highlighted some problems that may arise.

 
As early as September 2017, for example, Edelweiss Asset Reconstruction Company, creditors to Synergies Dooray Automotive Ltd, the first case in which the NCLT approved a resolution plan, filed an official complaint against the resolution professional. The issue: The resolution professional had mandated a plan that required Edelweiss to take a steep 94 per cent haircut on its exposure without considering alleged fraud by the company. This “fraud” involved the transfer of Synergies Dooray’s debt to related companies that essentially reduced Edelweiss’ voting share. The NCLT broadly dismissed the complaint, but the case did raise the issue of creditors’ rights and the resolution professional’s role in assuring the veracity of the process. The issue is significant because asset reconstruction companies and private equity and venture capital funds can be vital sources of risk capital for the bad debt reconciliation process. So far, however, these entities have offered limited participation in the process and several signature names had shown interest before steering away.

 
A significant reason for their misgivings is the opacity of the information-sharing process. Their principal complaint is that resolution professionals do not provide adequate data on the company concerned, including such basics as inventory levels, to allow for due diligence of the kind applied to, say, the standard merger and acquisition process. Factory visits, for instance, are also not forthcoming. This lack of transparency among resolution professionals is not limited to the risk capitalists. In the case of Binani Cement, for instance, Aditya Birla Group’s UltraTech has challenged the proceedings before the Kolkata bench of the NCLT that the resolution professional concerned did not offer any reasons for rejecting its bid, and has now upped its offers for the cement maker. All these issues may well be the convulsions of inexperience, and the IBBI had notified a formal complaint filing mechanism. But it would also benefit the process if it were to address in a proactive and dynamic manner the information needs of potential bidders so that this most significant attempt at bad debt resolution in independent India’s history does not end up mired in controversies and long-drawn lawsuits.

 

There are other problems, too. It is high time the IBC is tweaked to ensure that genuine bidders are not shut out. For example, the code should not leave scope for interpretation on issues of “related” and “connected” parties and must clearly specify whether past associations with disqualified entities are relevant and for how long.