Emerging white elephant
The hotchpotch and mingle-mangle created in the government's vision seem to have defeated the purpose of introducing the IBC
I have been coming across a barrage of news for the past few days about the government planning to amend the Insolvency and Bankruptcy Code after being bashed by the parliamentary panel on finance. The Parliamentary Standing Committee on Finance, in August 2021, lambasted the Union government and highlighted the delays, deviations, and deterioration in the insolvency process through the Code. Countless issues exist in the current form of IBC at the level of performance as well as the purpose of the government.
While introducing the IBC Bill in the Parliament, the then Finance Minister Arun Jaitley, lauded as its architect, had said, "the bankruptcy Bill will not only improve ease of doing business in India, it will also ensure a better and faster debt-recovery mechanism in the country." I can recall half a dozen times when the minister made boastful claims about the rapidity of the insolvency process.
Ironically, almost three-fourth of the insolvency cases, 73 per cent to be precise, have crossed the 270-day timeline allowed under the law. The high pendency of cases as well as countless objections raised over the resolution plan have been adding to the delayed disposal of cases. Such resolution plans decimate the value of assets, with haircuts going as high as 95 per cent.
Furthermore, numbers suggest that recoveries in most of the quarters range between 10 per cent to 15 per cent. The recovery rate hit the lowest of 10.2 per cent in the quarter of January-March 2022. According to the data of the Insolvency & Bankruptcy Board of India, in the first five years after the introduction of the law (till December 2021), there has been a debt recovery of only 31 per cent from the insolvency cases — meaning a loss of 69 per cent amount from the pocket of public exchequer!
Many conglomerates have tried to suck the money of creditors dry as soon as a company becomes bankrupt.
As far as the aim of the government is concerned, it lacks clarity of purpose regarding creditors' rights in the IBC mechanism. The disproportionate and illogical haircuts have efficiently provided a backdoor for corporates to escape and wreak havoc on creditors.
Going ahead, the trajectory of the IBC has been hard-hitting on the very idea of a welfare state. In many cases involving major players, state-owned entities have largely shown disenchantment and inactiveness in deals involving major private players and, at times, have chosen to back off in cases where private giants are competitors. In the example of the insolvency plan of Essar Power, NTPC had also shown interest but eventually did not end up submitting the bid. There was a huge opportunity for the public sector enterprise to make a bid for the deal at better prices, which it miserably missed.
The agile and unanimous nature of the resolution plans with huge haircuts in insolvency cases are equally noteworthy. In the NCLT, the consortium of lenders to Essar Power unanimously approved a resolution plan despite a huge haircut, further compelling the NCLT to approve the plan and pass the order. How often do we see such promptness and absolute agreements amongst lenders to lose around four-fifths of the money they lent? Once in a Blue Moon!
A major primary illusion of the current regime vis a vis the IBC is its idea of seeing and presenting insolvency as a substitute for recovery. The government seems to have missed a very central fact — the main objective of the IBC was not to recover money from debt disputes, but to bring out insolvency and maximise the asset value of corporate debtors, as simple as it gets! The objective should be clear — more resolutions of stressed assets than liquidations. The government is currently sailing against the tide.
In an October 2018 judgment, a Supreme Court bench had held that only the existence of a debt is sine qua non of initiating the insolvency resolution process. Certainly, the hotchpotch and mingle-mangle created in the government's mind of intentions seem to have defeated the purpose of introducing the Code.
The Code needs an urgent overhaul. Any amendment to the existing law should firstly realise that there is a massive scope in improving the haircuts if post hoc bids are legally allowed while the resolution process goes on. Secondly, the bottleneck of prolonging cases should be strongly dealt with. Besides providing scope for maneuvering, delay in the insolvency process leads to liquidation in most of the cases, eventually leading to erosion of the values of debtors' assets. Thirdly, appointments to the underperforming NCLTs should be accelerated, as against the sanctioned strength of 63, there are only 22 judicial and 25 technical members in the Tribunal. Fifthly and finally, the government should fix a deadline of 30 days to admit or reject a resolution plan. According to hearsay, this is what the Insolvency Law Committee has suggested to the government regarding amending the IBC.
Eventually, while thinking about the past journey of the IBC as well as the predictions on amendments, I get reminded of Thomas Paine's quote where he said, "Public money ought to be touched with the most scrupulous conscientiousness of honour. It is not the produce of riches only, but of the hard earnings of labor and poverty. It is drawn even from the bitterness of want and misery. Not a beggar passes, or perishes in the streets, whose mite is not in that mass."
The writer is an advocate and a spokesperson of the Aam Aadmi Party. Views expressed are personal
