The finance minister Arun Jaitley has hinted at a possible 'settlement scheme' to deal with the stressed loans in the near future. This scheme will go together with the Insolvency and Bankruptcy Act (IBC). Two years after the new bankruptcy code came into existence, there are many ideas that are under implementation and discussion to support the new code. Let's take a look at each of these ideas:
i) Settlement Scheme: FM Jaitley hinted at a pre-IBC mechanism, where the banks and the corporate would sit together to work out a debt settlement plan. Such a scheme will have challenges as banks need a court-approved mechanism to take haircuts. Any haircuts outside the court will invite future investigations by CBI/CVC. In fact, the failure of many restructuring schemes was the inability of bankers to take a haircut.
ii) Pre-packaged bankruptcy scheme: This idea was mooted by the government a few months ago where the banks and the corporate debtor will work out a restructuring plan beforehand and then approach the bankruptcy code to approve it. Currently, there are litigations and charges and counter-charges, which are delaying the decision-making process. Many cases have crossed the final deadline of 270 days. This mechanism will require an investment banking kind of approach from banks where they can evaluate the interest from strategic players or other investors before approaching the court.
iii) Project Sashakt: The government recently approved a new resolution plan named Project Sashakt, which is a three-point formula to avoid bankruptcy proceedings against the stressed corporate. Under the formula, the loan up to Rs 50 crore will be handled by the individual banks with a dedicated cell. The loan from Rs 50 to Rs 500 crore will have an inter creditors agreement (ICA), which will authorise the lead bank to work out a restructuring scheme on behalf of all the creditors. And the AMC-AIF (Asset Management Company-Alternate Investment fund) will be set up to deal with loans of over Rs 500 crore. This scheme is being implemented, but challenges galore as not many funds are interested. The banks, especially foreign banks, are not too keen on signing ICAs.
iv) Strengthening IBC: The solution actually lies in strengthening the IBC process by plugging the loopholes. Any new settlement scheme outside IBC will further delay the process.
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