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Photo: Mint

‘Bankruptcy law has changed the credit culture in banks’

A significant amount of recovery has been witnessed in the banking system since implementation of IBC

Since its inception in 2016, the Insolvency and Bankruptcy Code (IBC) has gone through several rounds of amendments. As part of the series ‘Future of Dealmaking’, Mint took a deep dive into the pros and cons of the IBC during a video interaction with Mehul Shah and Kumar Saurabh Singh, partners of law firm Khaitan & Co. Edited excerpts:

Has the IBC achieved its twin purpose of value maximization and time-bound recoveries?

Singh: IBC has proved transformational in terms of the right behavioural patterns and its recognition while sanctioning those who have not performed or holding onto assets where a change of ownership was the requirement. From that standpoint, restructuring forced by law is a big directional shift as it was something never seen in India. A significant amount of recovery for the banking system reflects in the quarterly results, and the pattern is continuing. From a broader perspective, IBC has delivered its promise in terms of changing the credit culture in the country, though there is room for improvement in view of the larger goal of a $5-trillion economy which will require more debt capital to support business and growth. With the interim suspension under IBC, several existing and new tools for resolution will have to be deployed to resolve stress.

What is the broad framework required to re-imagine the IBC?

Singh: In light of the suspension of Sections 7, 9 and 10 of the IBC, it is likely that the most feasible alternative available with the lenders is to resolve the stress in corporate debtors under the aegis of the Circular on Prudential Framework for Resolution of Stressed Assets issued by the Reserve Bank of India (RBI) on 7 June 2019 (the 7 June framework). This is a voluntary contractual framework for resolution of stress which covers a wide array of creditors regulated by RBI. However, it doesn’t cover investors in the bond market who are regulated by Sebi (Securities and Exchange Board of India) or PFRDA (Pension Fund Regulatory and Development Authority). This could be a potential area of conflict and requires coordination among regulators.

Do you think the time has come for adopting the good ‘bad-bank’ model?

Singh: Having a bad-bank is not a bad idea, particularly with the expected rise in stress levels in the banking system on account of the pandemic-led lockdown. It could certainly help stressed banks and financial institution to leave ‘sticky assets’ out of their balance sheets and deal with good assets and new business opportunities, which is what a commercial bank or development finance institution must primarily focus on. Having said that, the success of a bad-bank in resolving sticky assets will depend on giving the right incentives for resolution in a time-bound manner both for the insolvency and pre-insolvency resolution process (added advantage of being less costly and disruptive). Pre-pack, last-mile financing issues around contingent liability, operational creditors, statutory dues and taxation must be addressed to strengthen pre-insolvency framework of banks which can augment the success of bad-banks. Sebi has already taken key measures in allowing required flexibility for the pre-insolvency resolution for listed companies. Now it’s the turn of other arms of the government to move forward to support the pre-insolvency resolution framework to make the concept of bad-banks successful.

What are the three key drivers for India Inc.’s corporate restructuring needs in 2020 and beyond?

Shah: Traditionally, corporate restructuring used to be undertaken by solvent entities either to reorganize, or segregate and monetize the businesses. For example, IIFL Holdings Ltd, where one business separated into four listed companies and demerging of Sterlite Technologies Ltd. Second, through consolidation, as was the case with Skoda and Volkswagen. The third driver for solvent restructuring is acquisition, and a classic example is BirlaSoft KPIT. Finally, regulatory restructuring as that of telecom transactions witnessed by TMT (technology, media, and telecom) and financial services sectors pursuant to reorganization.

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