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Parliament panel suggests review of bankruptcy code

The report suggested a way to help homebuyers finding it hard to mobilize others to push for IBC proceedings against a builder (Photo: Mint)Premium
The report suggested a way to help homebuyers finding it hard to mobilize others to push for IBC proceedings against a builder (Photo: Mint)

The standing committee flagged in the report that haircuts taken by lenders are as much as 95% and more than 71% of the cases are pending for more than 180 days. These point to a deviation from the original objectives of the Code as intended by the Parliament

NEW DELHI : Delays in resolution, low recovery rates, and rising liquidation cases point to the need to review the Insolvency and Bankruptcy Code (IBC), a parliament panel suggested, arguing that the law has deviated from its aim of offering a quick resolution path to stressed companies.

The parliamentary standing committee on finance, chaired by Bharatiya Janata Party (BJP) leader Jayant Sinha, also recommended that the pre-pack scheme—an informal alternative bankruptcy resolution scheme offered to small businesses—may be extended to bigger corporations. The panel’s report was tabled in the Lok Sabha on Tuesday.

The committee suggested that efforts to incorporate cross-border bankruptcy resolution provisions into IBC may be expedited.

On Tuesday, the Rajya Sabha approved the IBC (Amendment) Bill, 2021, that replaces an April ordinance that cleared pre-pack resolution schemes for small businesses. The Lok Sabha passed this Bill on 28 July.

The standing committee report said that haircuts taken by lenders are as high as 95%, and more than 71% of the cases are pending for more than 180 days. These, the report said, point to a deviation from the original objectives of the Code as intended by Parliament.

“The Committee, therefore, feels that the design and implementation of the Code as it has evolved needs to be revisited, particularly in the light of its original aims and objects," the report said.

IBC is one of the significant reforms undertaken by the Narendra Modi administration, which helped India improve its ‘ease of doing business’ score in the World Bank rankings.

However, the economy has been on a downturn for the past four years, with FY21 growth contracting a record 7.3%.

The panel credited IBC for reducing the bankruptcy resolution time from 4.3 years in 2017 to 1.6% in 2020 and improving India’s ‘ease of doing business’ and ‘getting credit’ rank between 2017 and 2020.

The panel, however, pointed out that the fundamental aim of this statute was to secure creditor rights, which would lower borrowing costs.

“Greater clarity in purpose is needed with regard to strengthening creditor rights through the mechanism devised in the Code, particularly considering the disproportionately large and unsustainable haircuts taken by the financial creditors over the years," the panel said.

It also suggested that since the insolvency process has fairly matured now, there may be a need to benchmark the quantum of haircuts against global standards.

The committee proposed a professional code for lenders who take over a company in distress, given that the future of the business depends on lenders’ decisions.

Also, the panel suggested that there should be a single self-regulatory agency for insolvency professionals rather than having multiple insolvency professional agencies set up by the Institute of Chartered Accountants of India (ICAI), the Institute of Cost Accountants of India and the Institute of Company Secretaries of India who enrol and regulate their members.

The report also suggested a way to help out home buyers who wish to initiate bankruptcy proceedings against a builder but find it hard to mobilize 99 other buyers.

According to a 2018 amendment to the IBC, a minimum of 100 homebuyers, or 10% of the total flat purchasers, are needed for initiating the process.

The panel suggested that the builder be required by rules to give details of its other customers once a home buyer decides to file for the builder’s bankruptcy resolution in a tribunal.

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