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Business News/ Opinion / Views/  Integrity of insolvency processes: A tough ask
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Integrity of insolvency processes: A tough ask

Five years of India’s IBC have shown that it’s an imperfect handler of business bankruptcy, but we’ll need broader changes than IBBI’s new proposals to protect it from gaming efforts

Photo: BloombergPremium
Photo: Bloomberg

Henry Paulson, former US treasury secretary and Goldman Sachs chairman, is believed to have once said that regulation always lags innovation. It is also true, conversely, that good regulatory frameworks always anticipate changes, or require minimal tweaking as changes occur. India’s bankruptcy regulator, the Insolvency and Bankruptcy Board of India (IBBI), has been forced to ponder its efficacy and regulatory remit as the process under its watch threatens to go off the rails, gamed by various agents. The IBBI has put two discussion papers out for stakeholder feedback—on strengthening our framework for liquidation, and on issues related to the corporate insolvency resolution process (such as whether the committee of creditors, or CoC, should have a code of conduct). Our Insolvency and Bankruptcy Code (IBC), instituted in 2016 as a big reform, is in cross-hairs today for a host of reasons. There is wide apprehension that the IBC might go the way of previous failed attempts to comprehensively tackle corporate sickness or resolve the huge pile of bank loan defaults that business infirmity leaves in its wake. Huge delays in special courts, a glaring lack of court capacity, dubious decisions by resolution professionals and CoCs, asymmetrical information on the state of assets shared with different parties, and defaulters trying to game the system for favourable resolutions and steep haircuts are among the troubles that have rendered the process vulnerable to the venal.

Before the IBBI gets down to the nuts-and-bolts, however, it should examine some ground realities. The first is that the entire IBC process seems designed primarily to help banks, mainly state-owned, recover their dues. This may not be such a bad thing because loan recovery lets banks extend fresh credit that gives economic growth an impetus. Yet, designing a large part of the IBC process for this alone has created structural flaws because many public sector banks (PSBs) have carried over their flawed credit appraisal practices to the CoCs that take charge of insolvent firms for resolution, which tends to impair outcomes. These structural cracks need urgent repair. PSBs do have some utility for society, but need to improve their credit appraisal and asset valuation skills.

Another aspect that deserves analysis is the genesis of industrial sickness. The role of fickle government rules can’t be overlooked. A cursory look at our corporate graveyard reveals a crowd of power, road, telecom and mining projects that took on debt on the basis of government policy, but were hung out to dry when the state reneged on a commitment, changed a policy overnight, or failed to pay up on project completion. The other reason, not as endemic as the first but still notable, is India Inc’s old habit of gold-plating project costs. Many Indian industrial houses have over-borrowed relative to project costs and diverted those proceeds to either finance their own equity contribution or fund something else. Come economic slowdown, many of these projects were unable to generate adequate cash flows to service these irrational debts. While reducing concentrations of authority, as the IBBI proposes, could help in several ways, there’s a lot more that ails our system. As a regulator with ambitions of autonomy and productive outcomes, the IBBI may need to intensify its coordination with other regulators to strengthen its processes. Frequent legislative amendments and rule changes are unlikely to solve some of these deep-seated problems.

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Published: 02 Sep 2021, 01:03 AM IST
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