IBC And Its Effect On Distressed Assets Investment: Opportunities & Risks

A comprehensive Insolvency and Bankruptcy Code was brought out in 2016 to facilitate the process of resolving insolvency and providing an Exit route for the stressed assets. The objective was to overhaul the corporate distress resolution regime in India and to consolidate previous Laws (e.g. BIFR mechanism) to bring about a time-bound mechanism for resolution. This is based on the 'creditor-in-control model' as opposed to the 'debtor-in-possession' system.

Broad Features

When a case is registered under the code, there can be two outcomes. Either there is a resolution or liquidation.

The mechanism involves an attempt to arrive at a resolution of the stressed asset through restructuring the loans or bringing in new ownership through a well-defined process. The committee of creditors and other stakeholders have a crucial role to play in arriving at a resolution. The Change in ownership provides a platform for the potential investors to pitch in, and revive the Unit/project with an eye on good returns based on current valuations. If the resolution attempts fail, the company's assets are liquidated.

The IBC was intended to be a time-bound mechanism to handle the crucial issue of corporate financial stress and insolvency, as the previously existing available avenues of DRT, Lok Adalats, BIFR and SARFAESI did not deliver the desired results.

When a company or business turns insolvent or sick, it begins to default on its loans. For credit to revolve in the system and not get stuck, or tum into a bad loan, it is important that banks or creditors can recover as much as possible from the defaulter and as quickly as possible. The business can either get a chance, if still viable to start afresh with new owners or its assets can be liquidated fairly and transparently to minimise value degeneration.

Timeliness is of utmost importance here, so that the viability of the business and the value of its assets does not deteriorate further. The IBC initially stipulated a 180-day deadline to complete the resolution process with a permitted 90-day extension.

Past Experience

We have broadly seen mixed results in the past, since the inception of the IBC code in 2016. The mechanism has evolved requiring several amendments in the rules and procedures. It has been a learning experience for lenders, resolution professionals, a committee of creditors, NCLT themselves, and the borrowers. There have been protracted litigations and undue delays exceeding, for example, 700 days, negating the very objective of a timely solution. Over 6000 cases have been handled under the corporate insolvency resolution process (CIRP). About 67 per cent of cases have been closed. However, a large number of cases had to be handled through the liquidation process in the absence of a viable resolution through transfer to a new owner. The overall recovery rate has been quite low at around 30 per cent only.

Proposed Amendments

Realising the bottlenecks and intending to overhaul the entire process, the government proposes to bring in major changes in the code. As per the detailed document brought out by the Ministry of Corporate Affairs in January 2023, a comprehensive and wide range of changes has been suggested. The weak aspects relating to undue delays and repeated litigations are sought to be addressed to streamline the process and procedures.

Introduction of technology, transparency, and bringing out clarity in relevant clauses to ensure smoother implementation is required. The ground-level issues need to be identified and rectified step by step to attract good valuations and serious investors. The liquidation process also needs to be made more open, flexible, and equitable to provide comfort to the creditors

Opportunities and Risks

The above discussion indicates that, while there are ample opportunities for new investors to buy out stressed assets under the IBC code, there are several risks involved too. The IBC CODE was announced with good intentions for the long-term benefit to the economy by efficient handling of the resolution process and robust circulation of credit. However, the results need to be further improved by the removal of identified bottlenecks. The high rate of haircuts involved to the extent of 70 per cent needs to be addressed holistically. This will provide a win-win situation for all the stakeholders and attract new investment in stressed assets on competitive terms and realistic returns taking into account the inherent risks involved in each project. Proposed amendments/suggestions for the code are a step in the right direction for the long-term benefit of the economy and various stakeholders.

Sudhir Chandi

Guest Author Sudhir Chandi is Director at Resurgent India