‘Let banks decide on haircut, valuation of insolvent firms’
- Setting benchmarks for haircuts may disturb the bankruptcy code’s framework, say experts
- Preserving the commercial wisdom of lenders, tribunals will be key for the success of the IBC
Decisions on valuation of businesses undergoing bankruptcy proceedings, and the extent of haircuts taken while restructuring businesses should be left entirely to the creditors to ensure that resolutions under the Insolvency and Bankruptcy Code (IBC) remain a viable option, experts said.
With the Centre working on another round of amendments to the IBC after a Parliamentary panel raised concerns over “unsustainable haircuts” by lenders and said the government must set a benchmark comparable to global standards, experts are of the view that preserving the commercial wisdom of lenders and tribunals in deciding bankruptcy cases will be key for the success of the IBC framework.
However, with a section of lenders and investors preferring stressed asset restructuring outside the IBC for quick resolutions and better results, experts said a key reform is to ensure there are no delays in admitting petitions to the National Company Law Tribunal (NCLT).
“Building adequate capacity for the NCLT is critical for speedy resolution and restoring the rapidly eroding stakeholder confidence in the IBC,” said Sumant Batra, managing partner at law firm Kesar Dass B. and Associates. “Making the IBC process appealing to lenders as the most effective option in dealing with stressed assets is important for its success. The legislative framework must also ensure creditors’ flexibility in making key commercial decisions on a corporate defaulter, especially on valuations,” he said, adding that the NCLT and regulatory oversight should be non-intrusive.
Sahil Dhowan, director, Trans-Continental Capital Advisors LLP, a mergers and acquisition, and private equity advisory firm focusing on special circumstances such as pre-bankruptcy stress for businesses, said decisions around valuation of distressed assets are best decided by the market.
“Legally, restricting the maximum haircut for lenders will be counter-productive. We must let the market determine the discount. Regulations should focus on bringing certainty to the process. For example, one area where clarity is needed is the admission process.”
According to Dhowan, there was no reason for having to wait for two-three years to see a case getting admitted in tribunals. “The longer you wait, the more the value erosion,” he added.
Value realized by lenders in bankruptcy resolution has been a subject of intense debate. While the Parliamentary panel raised concerns over haircuts, data from Insolvency and Bankruptcy Board of India (IBBI), showed a different picture. Although the number of entities referred to the NCLT were more than those that could stitch together a revival plan under the IBC regime, in terms of asset value, 73% of the over ₹2 trillion involved in the cases were recovered till December 2021.
Recovery of investments under the IBC depends on several factors, including the size of the business, asset intensity and the timing of initiating the bankruptcy resolution process, said experts. Queries emailed to a ministry of corporate affairs spokesperson on Monday remained unanswered till press time.
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First Published:22 Mar 2022, 11:27 PM IST
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