Mumbai: The government has amended regulations under the Insolvency and Bankruptcy Code to introduce the concept of fair value and ensure better realizations for assets undergoing resolution.
The amendments define fair value as the estimated realizable value of the assets on the starting date of insolvency proceedings.
The regulations require the insolvency resolution professional—who takes charge of the assets—to hire two professional registered valuers to determine the fair value and liquidation value of the asset.
The insolvency professional then has to provide these values to the committee of creditors on condition of confidentiality. The creditor panel takes the final call on approving resolution plans submitted by bidders.
Lenders are in the middle of finalizing resolution plans for 11 of the 12 accounts that were referred to the National Company Law Tribunal for early insolvency proceedings, following the Reserve Bank of India’s directive in June 2017. The central bank followed this with a second list of 28 accounts, accounting for Rs2 trillion in bad loans, in late August.
Earlier this year, the Insolvency and Bankruptcy Board of India (IBBI) had done away with the requirement of disclosing the liquidation value of an asset undergoing resolution. This move came after investors/buyers were using the liquidation value to submit bids for these assets.
Recently, lenders to Amtek Auto had rejected the bids received for the company on the grounds that they were lower than the liquidation value. Amtek Auto is one of the 12 companies identified by RBI for insolvency proceedings.
According to an Indian Express report based on Economic Survey data, financial creditors were able to recover 33.53% of their total claims of Rs5,500 crore in 10 cases that underwent resolution process under the insolvency code.
“With information on both fair value and liquidation value after the receipt of resolution plans, the financial creditors will be in a better position to evaluate and negotiate the bids offered. The bidders are also expected to put in a bid at a realistic value knowing that the financial creditors will be aware of both the liquidation value and fair value. This will enable better value realization," said Sumit Binani, a resolution professional with Grant Thornton.
The amended regulations also mandate that the resolution professional submit evaluation criteria to the resolution applicants at least 15 days before the submission of their plans. Any changes to the evaluation criteria also have to be done within the said timeline, the regulation said. Typically, evaluation criteria lay down details regarding the funds to be brought in by the resolution applicant, conversion into equity, etc.
“This move will help improve transparency in the process of evaluation of resolution plans. Informally, in some cases this was happening, now it has been formalized," said Aashit Shah, partner, J Sagar Associates.