Value Of Assets Deplete When There Is Delay In IBC Proceeding: RBI Guv

RBI Governor Shaktikanta Das on Thursday raised concerns about the prolonged delays in resolving distressed assets through bankruptcy courts, which ultimately affects the value of assets. The central bank’s governor provided data that highlights the time taken to even admit a case in the counts.

"As of September 2023, 67 per cent of the ongoing corporate insolvency resolution process (CIRP) cases have already crossed the total timeline of 270 days, including the possible extension period of 90 days," Das said while speaking at the Conference on Resolution of Stressed Assets and Insolvency and Bankruptcy Code (IBC) organised by the Centre for Advanced Financial Learning.

RBI Governor said that it is a matter of concern that the average time taken for admission of a case during the financial year 2020-21 (FY21) and FY22 was 468 days and 650 days, respectively. Such long delays will significantly reduce the value of the assets. The Insolvency and Bankruptcy Code (IBC) requires the completion of the Corporate Insolvency Resolution Process (CIRP) within 180 days, with a one-time extension of up to 90 days in exceptional circumstances.

The recovery rate from IBC processes, which was enacted in 2016, is 32 per cent. As of September 2023, creditors have realised Rs 3.16 trillion out of the admitted claims of Rs 9.92 trillion, which works out to a recovery rate of 32 per cent.

He emphasised that the stressed assets would have already lost significant value before being admitted under the Insolvency and Bankruptcy Code (IBC). Das stated that comparing the realised value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process.

Instead, the resolution value should be compared with the liquidation value of stressed assets or the fair value at the time of admission into IBC. When evaluated from these two parameters, the realisation rates are 169 per cent and 86 per cent, respectively, which appears to be encouraging, according to Das.

According to Das, there are several reasons for the delay in resolving insolvency cases. These include the evolving legal principles related to the Insolvency and Bankruptcy Code, tactics used by some corporate debtors during litigation, ineffective coordination among creditors and problems with the judicial system's infrastructure, among others.

Das also highlighted concerns about the Committee of Creditors' (CoC) behaviour during the insolvency proceedings. The Adjudicating Authorities have expressed worries about the CoC's conduct, including a lack of participation in meetings, poor engagement or coordination among creditors, and prioritising individual interests over the collective interests of the group when designing resolution plans. Das warned that this could be harmful to the resolution plan itself.

According to the RBI statement, there has been a noticeable trend in recent years towards balancing the rights of operational creditors and financial creditors under the Code. Das expressed that financial creditors' risks need to be compensated on a priority basis that is commensurate with the degree of risk that they undertake.

While the focus on ensuring equity among all stakeholders is commendable, there needs to be some differentiation in weightage assigned to different categories of creditors, depending on the degree of risk undertaken. It is essential to recognise that financial creditors bear the maximum risk and therefore, their risk must be compensated appropriately and given priority.