History is a great teacher. Those who ignore its lessons are doomed. Any legislative enactment and implementation thereof needs to constantly evolve to meet the challenges in the ecosystem.
Let's start with a glaring instance. There are a set of Debt Recovery Tribunals (DRT) that were created for the recovery of creditors' dues.
At its peak, it had a phenomenal recovery rate of 81.1% in 2008-09 as per RBI's trend and progress of banking report for the same period. However, in over a decade, it has gone down to 3% in 2018-19. Any enactment and the edifice around it has to reorient itself constantly to keep the infrastructure relevant, and the government has a responsibility to frame a conducive environment to optimise the results by creating and updating infrastructure, timelines, and addressing issues that come its way.
COVID-19 has created massive financial disruptions and challenges in the financial system have grown in scale and complexity. In an article co-authored recently by Raghuram Rajan, former Governor of RBI, and Viral Acharya, former Deputy Governor of RBI have suggested, amongst others, for a review of one of the key aspects of the Insolvency and Bankruptcy Code (IBC), which mandates a change in management, barring promoters from bidding for the firm, particularly in changing dynamics of the post-pandemic world.
Post-COVID-19, governments are struggling to find a solution to kick start the economy after unprecedented degrowth in the last six months. The rules are being rewritten to mitigate the hardship. As an example, interest on unpaid interest is a normal banking practice to capture the time value of money. However, the government recently submitted in the Supreme Court for exemption of interest on interest for certain categories of loans to SME and retail customers not exceeding Rs 2 crore, during the loan moratorium announced by RBI. Unusual times need unusual solutions.
It is learnt that the Prime Minister's Economic Advisory Council has reportedly reached out to stakeholders for IBC reforms to improve its functional effectiveness. There are several areas under discussion, like Covid emergency credit line to be treated as priority finance.
Sure, this is timely and appropriate. Another one is a provision like the one introduced in the UK for a moratorium on creditor action to companies who commit to keep the stressed companies as going concerns and need some additional time to address liquidity issues. Another concern being reportedly discussed is how to bring various government departments and regulatory agencies on the same page as far as adhering to the IBC spirit is concerned.
Also Read: Rajya Sabha passes amendment in IBC
The IBC has been a landmark legislation in recent times. However, its effectiveness has not been optimal. As reported in the recent IBBI newsletter, 52.96% of cases that were closed yielded orders for liquidation as compared to 13.86% which yielded in resolution.
It is explained that most of the cases heading for liquidation were earlier with BIFR or defunct. Notwithstanding that disclaimer, the fact remains that there are not enough resolution applicants to rescue the distressed firms and, in some cases, where resolution plans are approved, various agencies like ED, DoT, and regulators like RBI and SEBI have entered at a later stage to create new claims and complications.
Two important challenges to focus on now are how to broad-base the ambit of resolution applicants and to have a nodal agency that interprets the IBC with an element of finality among conflicting government departments and regulators.
One of the suggestions, already doing rounds, is that in respect of instances where there are differences among ministries, enforcement agencies, and regulators over IBC, a law passed by Parliament, the views of the Ministry of Corporate Affairs which oversees the implementation of IBC should prevail. It is a good idea.
There needs to be a nodal agency to address the confusion which is leading towards resolution time overruns and consequently, value erosion.
IBC is a time-bound process and any factor that adversely affects timelines need to be addressed on priority. In order to ensure timely completion of IBC, out of court settlement (prepack resolution) needs to be encouraged, and the NCLT, NCLAT infrastructure needs to be strengthened.
It should not go the DRT way, where the timeline for disposals is six months, and due to crumbling infrastructure, even hearings are adjourned for months.
Secondly, unless a default is wilful and declared so, or there is fraud or siphoning off money brought out by a forensic audit, promoters may be given an opportunity to be a part of the resolution or liquidation process. This is already available for MSME borrowers but needs to be made available across all segments.
The more the players, the more the competition. More are the chances of units surviving as going concerns, as honest promoters (and not all promoters are dishonest) will not like to abort their own entities This will help value maximisation and economic revival which is in the greater interest of the financial system.
(The views expressed by the author are personal and do not represent any organisation or body he is associated with)
(The author is a Policy analyst and columnist)