Securities and Exchange Board of India (Sebi) Chairman Ajay Tyagi on Monday said the positive impact of the Insolvency and Bankruptcy Code (IBC) implementation would be visible in the domestic corporate debt market in five years.
Speaking at a conference on the IBC, Tyagi said the implementation of a resolution framework has ushered in behavioural changes in corporate debtors and in the way promoters and creditors treat debt defaults. “The threat of losing control of the company is forcing many promoters to pay off debt even before insolvency is started,” he said.
The Sebi chief said globally, reforms in bankruptcy laws have generally been found to have a positive impact on the corporate bond markets owing to increased investor confidence. On Sebi’s contribution to the implementation of resolution plans, he said relaxations from various regulatory requirements, such as delisting of shares and an open offer to public shareholders, were given by amending Sebi’s takeover regulations.
Regarding the state of affairs before the introduction of the IBC, Tyagi said in the pre-IBC era, India lacked an efficient mechanism for the closure of unviable firms.
He said before the IBC, there was a positive bias towards rescuing failing businesses for the sake of saving organisational capital and employment. Moreover, there were inherent deficiencies in legal provisions that were exploited by promoters for delaying recoveries and indulging in asset-stripping before resolution.
Regarding the crisis in the financial sector, the Sebi chief said such things affect the trust of investors, but that does not mean everything is wrong. “Whatever improvement is required, we are doing it quite quickly... whatever is in Sebi’s domain,” Tyagi said, referring to action taken regarding the Karvy Stock Broking issue. “Karvy was in our domain. We acted promptly. We are trying to improve on the rating agencies side and bond-market development,” Tyagi said. On November 22, Sebi barred Karvy from taking new clients and also prevented it from using a power of attorney (PoA) given by clients after the broker was found to have allegedly misused their securities.
Tyagi said that a separate resolution and bankruptcy framework for financial service providers is the need of the day, considering that many financial service providers deal with substantial client funds and are systemically important. In the future, a framework to deal with the synchronous resolution of group companies also needs to be perhaps examined, he added.