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CEA Krishnamurthy Subramanian.
CEA Krishnamurthy Subramanian.

Bankruptcy framework needs to be made more efficient for developing stressed asset market: CEA

Subramanian’s suggestion is particularly relevant for public sector banks, in which individual executives may shy away from timely and bold decisions about the worth of an asset fearing an enquiry into the wisdom of it at a later date by regulatory or investigating agencies

India’s bankruptcy ecosystem needs to be made more efficient to develop the market for stressed assets in the post-pandemic era, chief economic advisor Krishnamurthy Subramanian said here.

The bankruptcy framework can be improved by enabling bankers to take economically efficient decisions, which entail assessing the fair value of sinking firms with the necessary haircut, Subramanian said at a webinar on "investment opportunities in stressed assets" organised by Federation of Indian Chambers of Commerce and Industry (FICCI).

Subramanian’s suggestion is particularly relevant for public sector banks, in which individual executives may shy away from timely and bold decisions about the worth of an asset fearing an enquiry into the wisdom of it at a later date by regulatory or investigating agencies.

Subramanian also said that corporate India needs to recognise that ceding control of failing firms may be an inevitable part of equity contract. One of the major areas of litigation which delays resolution of bankruptcy cases is the reluctance of major shareholders in ceding control. The bankruptcy code allows majority lenders to take critical decisions about the company including adoption of resolution plans or to liquidate the company.

Subramanian said that the ecosystem should take care of the distress that will invariably settle in businesses due to the pandemic as is the case everywhere in the world.

Debt re-negotiation where the face value of the debt is reduced can help in bringing new investment but that involves exercising significant amount of judgement by bankers, Subramanian explained. “The ability to arrive at a fair value of the loan with necessary haircut involves significant judgment," he said, adding that analysing such decisions without appreciating its nuances and with a hindsight bias could lead to enormous risk aversion and can make it very difficult for bankers to do what is economically efficient. Exercising such judgement is important for the stressed asset market, he said.

“The eco-system of creative destruction is a very important part of any economy," he said, adding that establishing a market for price discovery of stressed assets was also important.

According to Nikhil Shah, managing director of Alvarez & Marsal India, a management consultancy, the size of the stressed asset investment opportunity in India was 200 billion prior to the covid pandemic.

Sudhakar Shukla, whole time director of Insolvency and Bankruptcy Board of India (IBBI), the bankruptcy rule maker, who was also present at the webinar, said a panel led by IBBI chairperson M.S. Sahoo will submit a report to the government on ‘pre-packaged bankruptcy resolution schemes’ within a week. The government will then decide on the rollout model, he said. Pre-packaged resolution schemes offer a quick corporate rescue option, which will be finalized mostly in boardrooms than in courts to save time and to avoid legal battles. Under this, creditors and shareholders can approach a bankruptcy court with a pre-negotiated corporate reorganization plan as is prevalent in countries such as the US and the UK.

Shukla said that the Bankruptcy Code is a potent tool which has helped in resolving 270 cases involving $30 billion in capital. Also, more than 50,000 cases with a total value of around $90 billion worth of capital under stress have been withdrawn from bankruptcy proceedings, he said. This indicates out of court settlement.

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