The Parliamentary standing committee on finance’s report on the Insolvency and Bankruptcy Code (IBC) has come down heavily on the Union government and pointed out a number of shortcomings in the Code while recommending an overhaul.
Taking a grim view, the standing committee headed by Jayant Sinha observed that the IBC may have 'digressed from basic design' and the last six amendments to the law have given it a 'different orientation, not originally envisioned'.
The actual implementation of the six amendments made so far to the legislation may have altered and even digressed from the basic design of the statute and given a different orientation to the Code not originally envisioned, the committee said in its report titled “Implementation of Insolvency and Bankruptcy Code — Pitfalls and Solutions”.
The report tabled in Lok Sabha said financial creditors took 4,356 companies to National Company Law Tribunal (NCLT) under the IBC to recover Rs6.77 lakh crore, while the operational creditors moved the court against 8,331 companies to recover their dues worth Rs78,000 crore. In 266 cases, the companies themselves moved NCLT after they failed to repay debt worth Rs52,000 crore.
The committee highlighted that IBC has low recovery rates with 95% haircuts; over 71% of the cases are pending for over 180 days.
According to the committee's report, out of 20,963 cases pending in tribunals, 13,170 cases are of IBC, with amount involving Rs9.20 lakh crore.
The report further observed, “It's a matter of grave concern that insolvency process stymied for long delays beyond 180 days” and “disproportionately large and unsustainable haircuts have been taken by financial creditors.”
The panel said that IBC has 'deviated' from the original objectives intended by Parliament and there is a need to revisit its design and implementation as it has evolved over the past five years.
The committee has highlighted that the fundamental aim of this statute is to secure creditor rights which would lower borrowing costs as the risks decline.
“Greater clarity in purpose is needed with regard to strengthening creditor rights through the mechanism devised in the IBC, particularly considering the disproportionately large and unsustainable ‘haircuts’ taken by the financial creditors over the years,” the committee reasoned, while recommending a benchmark be put in place for the quantum of such ‘haircuts’ to be taken by creditors, in line with global standards.
The ministry of corporate affairs (MCA) responded by saying that ‘the commercial wisdom of the committee of creditors (CoC) is supreme’ in IBC cases but the standing committee affirmed that there was an ‘urgent need to have a professional code of conduct for the COC’ to define and circumscribe their decisions.
The standing committee has also come down hard on bids being placed after the announcement of the highest bidder (H1).
It said that these bidders typically wait for the H1 bidder to become public and then seek to exceed this bid through an unsolicited offer that is submitted after the specified deadline. The CoCs have discretion in accepting late and unsolicited resolution plans.
“Late, unsolicited bids create tremendous procedural uncertainty, genuine bidders are discouraged from bidding at the right time. The overall process is vitiated and there are significant delays leading to further value erosion.”
The committee has recommended, “IBC needs to be amended so that no post hoc bids are allowed during the resolution process. There should be sanctity in deadlines so that value is protected and the prices move smoothly.”
The standing committee also pitched for “a professional code of conduct for the CoC which will define and circumscribe their decisions.” The committee submits this is an urgent need.
The committee has also recommended amending the IBC to clarify that resolution can be achieved through proper implementation of the CIRP regulations.
According to Corporate Insolvency Resolution Process (CIRP) rules, the resolution professional is allowed to sell parts of a business to multiple bidders. This offers greater flexibility to the resolution as the standing committee observes that often bidders are interested in different parts of the corporate assets and not the entire business.
The standing committee also recommended that NCLT must admit cases in 30 days to cut down on delays. The report said the NCLT takes considerable time in admitting cases that leads to asset stripping, funds diversion by the defaulting promoter.
“NCLT should accept defaulters within 30 days and transfer control to a resolution process during this period,” the committee's report said.
The committee said as the cases decided at the NCLT are litigated at the NCLAT and the Supreme Court (SC), it is imperative that the NCLT members should be highly trained and well experienced. “The committee believes that the NCLT judicial members should be at least High Court judges so that the country will benefit from their procedural experience and wisdom.”
On the role of resolution professionals, the committee said a professional self-regulator for insolvency resolution professionals (IRPs) that functions like the Institute of Chartered Accountants of India (ICAI) should be put in place. The committee, therefore, recommended that an Institute of Resolution Professionals may be established to oversee and regulate the functioning of RPs so that there are appropriate standards and fair self-regulation.
Expressing apprehensions over fresh graduates being appointed as IRPs, the committee said it is doubtful about their competency in handling cases of huge and complex corporations and flagged ‘numerous conduct issues’ in their functioning. Disciplinary action has been taken in the case of 123 RPs out of 203 inspections conducted so far, it pointed out.
With respect to the low recoveries by the banks under the IBC with haircuts as high as 95%, the committee report quoted the secretary of MCA who said, initially when the companies came to the IBC, 33% of the companies that were rescued were defunct and virtually did not have anything. Of the companies that liquidated, almost 73% of these companies were defunct.
The MCA said recovery also depends on what stage a company comes to the IBC. "If it is at a stage where it can be revived and restored and, if it is resolved, the results will always be better. We can show previous cases where it has come at a proper stage and even the recovery, though incidental, has been quite good and there have been cases where recovery has been even up to 80%-90% also," the ministry informed the committee.
"Nevertheless, the resolution value is almost 188% of the liquidation value. If the companies come for resolution the alternative is to go for liquidation, then they will get much lesser value than what they are getting now. The IBC is not designed for haircut, but the commercial wisdom is lying with the committee of creditors. If the CoC does not agree to a 90%-95% haircut, then the plan will not go to NCLT. If it does go to NCLT, then it will not be approved and then the company will go for liquidation or financial creditors will have to go for another mode of recovery," the report said.
On the functioning of NCLTs, the adjudicating authority under the IBC, the committee said their tardy admission of cases and approvals of resolution plans were the main reasons for delays in insolvency resolution.
Expressing ‘deep concern’ about the NCLT currently functioning without a regular president and 34 members short of its sanctioned strength of 62, the committee said this issue has plagued the tribunal for years and the vacancies must be filled ‘without any further delay’.
The secretary, MCA responded to this and said that active steps were being taken to fill the more than 50% vacancies, which was attributed to ‘a lot of retirements’ happening in May and June this year.
“In the National Company Law Appellate Tribunal- NCLAT, against the sanctioned Bench strength, we have vacancy of Chairperson and two Members only,” the Secretary said. The NCLAT has two benches with an approved strength of a chairperson and 11 members.
The standing committee also said that the rationale behind multiple Insolvency Professional Agency (IPA) overseeing the functioning of their member IPs instead of a single regulator is unclear and this current practice would lead to a conflict of interest between the regulatory and competitive goals of the IPA.
The Indian banks' funds worth Rs9.2 lakh crore are currently stuck in the NCLT after they took defaulters to the court under the Code.
There is, therefore, a need for thorough evaluation of the extent of fulfilment of the original aims and objects during the implementation of the Code over the years, the panel added.