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Chief economic adviser Krishnamurthy Subramanian. Mint
Chief economic adviser Krishnamurthy Subramanian. Mint

Bankruptcy framework needs to be made more efficient, says CEA

  • 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

India’s bankruptcy ecosystem needs to be more efficient to develop a market for stressed assets in a post-covid world, chief economic adviser (CEA) to the government Krishnamurthy Subramanian said on Wednesday.

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’ organized by the Federation of Indian Chambers of Commerce and Industry (FICCI).

The CEA’s suggestion is particularly relevant for public sector banks, as executives may shy away from timely and bold decisions about the worth of an asset, fearing an inquiry into his actions at a later date by regulatory or investigating agencies.

He said that corporate India needs to recognize 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 on resolution or liquidation of a company.

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

Debt renegotiation, where the face value of the debt is reduced, can help bring in new investments, but that involves exercising significant amount of judgement by bankers, he said. “The ability to arrive at a fair value of the loan with necessary haircut involves significant judgement."

Analysing such decisions without appreciating its nuances and with a hindsight bias could lead to enormous risk aversion and can make it difficult for bankers to do what is economically efficient. Exercising such judgement is important for the stressed asset market, he said.

“The ecosystem of creative destruction is a very important part of any economy. Establishing a market for price discovery of stressed assets is also important," he said.

According to Nikhil Shah, managing director, Alvarez and Marsal India, a management consultancy, the size of the stressed asset investment opportunity in India was 20,000 crore before covid-19.

Sudhakar Shukla, whole-time director, Insolvency and Bankruptcy Board of India (IBBI), the rule maker, 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 Centre will then decide on the rollout model, he added.

Pre-packaged resolution schemes offer a quick corporate rescue option. It will be finalized mostly in boardrooms than in courts to save time and to avoid legal battles. Creditors and shareholders can approach a bankruptcy court with a pre-negotiated corporate reorganization plan as is prevalent in the US and UK.

Shukla said the bankruptcy code is a potent tool and has helped solve 270 cases involving $30 billion in capital. Besides, over 50,000 cases worth $90 billion of capital under stress were withdrawn from bankruptcy proceedings. This indicates out-of-court settlements, he said.

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