BackIf we find a problem with the regulations, we will modify them: M.S. Sahoo
Insolvency board chairman M.S. Sahoo on the Insolvency and Bankruptcy Code
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Mumbai: In September, M.S. Sahoo was named chairman of the Insolvency and Bankruptcy Board of India. Sahoo was previously a member of antitrust regulator Competition Commission of India and capital market watchdog Securities and Exchange Board of India (Sebi). At Mint’s Stressed Assets Investment Summit on 16 December, Sahoo spoke about the Insolvency and Bankruptcy Code, 2016, which is aimed at ensuring time-bound settlements of insolvency, enabling faster turnaround of businesses and creating a database of serial defaulters. Edited excerpts from an interview:
The bankruptcy code proposes a paradigm shift from the existing “debtor in possession" to a “creditor in control" regime. What does that mean for corporate entities and lenders?
Whatever we have learnt from international experience, we thought that we should go for creditor in possession model, even though many countries have the debtor in possession model. We do not know which is the best, but as of now we think that this will work. This model puts tremendous pressure on the debtors. If they do not perform well and they do not honour commitments, there is a big fear that the entire control and resources move from the debtor to the creditor.
There is an allegation that even by Western standards this bankruptcy code seems to be too ambitious. In fact, a column in Mint said and I quote: “The code assumes the existence of an institutional infrastructure like information utilities and insolvency professionals, information repositories, a new regulator without the failings of existing regulators, and a high quality adjudication infrastructure. Unless these four pillars are in place the code will fail." How do you react to that?
I think we have come up with a code that will solve our purpose. We have come across many instances where people have said: this has not worked in America. When we did the dematerialization in 1995, everyone said that America has not done the dematerialization of depositories, and that this will not work. There was a large group of vested interest people, even after the law was made, that stalled its implementation for four-five years. But ultimately no change was made in the law and it is working well. It could be aggressive, but in India we have examples of implementing aggressive reforms very successfully.
Second, about the infrastructure part, you cannot expect that the capacity will develop without work. You do not learn swimming without starting to swim. If you want NCLT (National Company Law Tribunal), insolvency professionals to have capacity, you have to allow them to take up a transaction. Not that you do not take proper precautions and that you just jump into the swimming pool. You take proper care, but the capacity will develop only as you start working.
There is a feeling that Reserve Bank of India keeps changing mechanisms quite fast—there was SDR (strategic debt restructuring), then came S4A (Scheme for Sustainable Structuring of Stressed Assets). Earlier we had CDR (corporate debt restructuring). But nothing much has worked for resolution. There is a feeling that people have lost faith in the mechanism. What is your reaction to that?
It is not that everything you do, in the first effort you get it right. We got the Sebi Act in 1992, but the real Sebi came in the 1995 amendment to the Act. We got a lot of learning in those three years. We did experimentation and we learnt that if you give freedom to people, you can get fly-by-night operators. There can be problems, but we anticipate as many problems as we can and we provide for them, and we remain ready to modify the regulations if we find any deficiency. These regulations, if we find a problem, we will modify them. This goes much beyond bank financing and it even goes to individual bankruptcy and insolvency. This is a complete framework and we have created a market-determined approach. So far we didn’t really allow the market to work.
Like the example of stock markets, an IPO (initial public offering) works well because we allowed the market to work. So far we were relying on the state to work for the market. We have moved away from that model.
Can you throw some light on how mergers and acquisitions will shape up in the light of the new bankruptcy code?
One of the feedbacks is that because there will be a pressure of 180 days, there will be pressure because the creditor can trigger this process. So before actually triggering this process, it sensitizes all the parties to look at some kind of restructuring. The resolution plan itself can have mergers and amalgamations. So the creditors themselves or with other stakeholders can say that as part of the resolution plan, we want to merge these two companies. This should be possible as part of the resolution plan.
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