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Evolution of IBC, lessons

learnt and path forward


Injeti Srinivas
Secretary, Corporate Affairs
Government of India

24 SEPTEMBER 2018
Presentation structure
•Pre-IBC phase
•Evolution of IBC
•Performance and Lessons learnt
•Challenges and Path forward
Ministry of Corporate Affairs, GoI 2
Pre-IBC phase: fragmented structure
• Fragmented insolvency resolution framework
• Multiple laws with multiple recovery and resolution mechanisms:
• Sick Industrial Companies Act (SICA) 1985 supported by BIFR & AAIFR
• Recovery of Dues to Banks and Financial Institutions (RDBFI) Act, 1993
supported by DRTs and DRATs
• Securitization and Reconstruction of Financial Assets (SARFAESI) Act, 2002
• Companies Act 2013
• Lok Adalat or “Public Court”, alternative dispute resolution mechanism set up
under Legal Services Authorities Act 1987 with statutory powers of a civil
court
• Absence of collective insolvency law

Ministry of Corporate Affairs, GoI 3


Pre-IBC phase: poor recovery
• The focus of RDBFI and SARFAESI Acts was primarily focused on
recovery
• Though SICA was meant for rehabilitation of sick industries it was not
very successful, as promoters were deeply entrenched and dragged
the proceedings endlessly
• The recovery performance through lok adalats, DRTs and SARFAESI
was poor (17%); average annual recovery was INR 274 billion (about
2.88 billion GBP), which was negligible
• Accounts involving over INR 8 trillion (84 billion GBP) were stuck in
different courts
Ministry of Corporate Affairs, GoI 4
Pre-IBC phase: ballooning of NPAs
• Between 2006 to 2013 there was exponential growth in
public sector bank credit with scant regard to debt
sustainability and credit risk due to over optimism
• Gold-plating in large accounts accentuated credit risk
• Economic slowdown shrank corporate repayments to banks
• NPA crisis was postponed by ever-greening loans
• By early 2014 there was credit slowdown due to twin
balance sheet problem and risk aversion of public sector
banks

Ministry of Corporate Affairs, GoI 5


Pre-IBC phase: RBI crackdown
• 2013: introduced revised CDR but met with little success
• 2014: Asset Quality Review was undertaken to expose bad loans and
compel banks to rescue stressed assets; CRILC to monitor NPAs
• 2015: introduced SDR (creditor in control approach) but the
comprehensive turnaround strategy evoked little response, as banks
remained skeptical
• 2016: introduced S4A, debtor in control approach, provided at least 50% of
outstanding debt is sustainable
• 2017: Revised Prompt Corrective Action framework
• February 12, 2018, RBI discontinued all these schemes, including JLF, due
to unabated increase in NPA percentage, crossed 10%

Ministry of Corporate Affairs, GoI 6


Pre-IBC phase: new RBI framework
• RBI introduced a three-pronged strategy:
• Independent credit evaluation (ICE) by authorised CRA for restructuring of accounts
with exposure of INR 1 billion (10 million GBP) and above;
• For accounts with exposure of INR 20 billion (210 million GBP) and above, bank
required to put in place and implement a resolution plan within 180 days of default,
failing which the account to be referred to NCLT within 15 days; and
• For other accounts >INR 1 billion but < INR 20 billion, RBI has announced reference
dates for implementation of resolution plan over a two-year period
• After empowerment under the Banking Regulation Act, in May 2017, RBI
directed banks to refer the Big 12 with a total outstanding of INR 3.45
trillion (36 billion GBP) to NCLT in June 2017, followed by another 25 cases
involving INR 2 trillion (21 billion GBP)in December 2017. In other words,
more than 50% of the total NPA of INR 10 trillion (105 billion GBP) came
into IBC system, which was the TURNING POINT for the gamechanger Code

Ministry of Corporate Affairs, GoI 7


Evolution of IBC: the trigger
• The single most important trigger was the twin balance sheet
problem, which threatened to push the economy in a downward
spiral
• Second trigger was to have a collective insolvency law
• Supreme Court in Innoventive Industries matter stated that the IBC
has brought about a paradigm shift in insolvency law in India
• It further stated that, “entrenched managements are no longer
allowed to continue in management if they cannot pay their debts”
• This reflects the spirit of IBC

Ministry of Corporate Affairs, GoI 8


Evolution of IBC: the philosophy
• Shift from ‘debtor in control’ to ‘creditor in control’ approach
• Focus on resolution as opposed to only recovery
• Timebound resolution
• Maximizing value of assets
• Balancing interests of all stakeholders
• Promoting availability of capital
• Promoting financial discipline
• Promoting market for stressed assets

Ministry of Corporate Affairs, GoI 9


Evolution of IBC: some crucial features
• Creditor-driven on the lines of UK insolvency law
• Can be triggered by financial creditor, operational creditor, or
corporate applicant
• Court (NCLT) has very limited role
• CoC is fully empowered to take commercial decisions
• Well laid down corporate insolvency resolution process (CIRP)
• ‘going concern’ concept
• Resolution professional is individual (no surety/ insurance)
• Government dues highly subordinated in the liquidation waterfall
Ministry of Corporate Affairs, GoI 10
Evolution of IBC: fast tracked
• August 2014: Bankruptcy Law Reforms Committee (BLRC)
• November 2015: BLRC submitted its report to government
• May 2016: IBC bill passed
• June 2016: NCLT and NCLAT established
• October 2016: Insolvency and Bankruptcy Board of India (IBBI) set up
• November 2016: IBBI regulations notified
• December 2016: IBC commenced
In less than two years the new legal framework along with its
underlying infrastructure was put in place

Ministry of Corporate Affairs, GoI 11


Lessons learnt: case load
• IBC performed against all odds (a nascent RP profession; unregulated
profession of Valuers; non-operational information utility; and
overburdened NCLT)
• As of quarter ending June 2018, against 8,649 cases (including
transferred cases), 4,390 cases were disposed of and 4,256 cases
remained pending
• Nearly 8o% of cases disposed were in the form of settlement prior to
admission resulting in INR 1.2 trillion claim settlements (12.6 billion
GBP)

Ministry of Corporate Affairs, GoI 12


Lessons learnt: IBC recovery performance
• 1,094 cases admitted for CIRP in last 20 months; 45 resolved (average
time taken was around 236 days); 189 placed under liquidation (most
of them BIFR transferred cases); and 111 in review or appeal; 749
cases currently undergoing CIRP
• As of now, around 50% recovery with around INR 508 billion (5.35
billion GBP) against claims amounting to INR 1.15 trillion (10.07 billion
GBP)
• Around INR 400 billion (4.21 billion GBP) NPA accounts reported to
have become standard
• In all, INR 2.1 trillion (22.2 billion GBP) recovered directly or indirectly
due to IBC
Ministry of Corporate Affairs, GoI 13
Lessons learnt: Big 12
• Out the 12, 4 have been settled (BSL, Electrosteel, Monnet Ispat & Energy
and Amtek Auto); 5 are in process(Essar Steel , BPSL and AGB Shipyard, Era
Infra and Jaypee Infratech); 1 has been placed under liquidation (Lanco
Infratech); 1 stayed by NCLAT (Jyothi Structures liquidation)and 1 is
awaiting NCLT nod (Alok Industries)
• Apart from the above, in 111 cases RPs have filed application before NCLT
for punitive action against credit debtors for irregular or fraudulent
transactions
• One major criticism against IBC is regarding deep haircut but this is not
correct, as recovery must be measured against liquidation/ enterprise
value and not total claims. Recovery is good if underlying value is good (in
BSL over 65%; highest bid received in Essar if accepted would result in
greater than 80% recovery)

Ministry of Corporate Affairs, GoI 14


Lessons learnt: World Bank DBR ’18
• World Bank DBR’18 assesses insolvency regimes across jurisdictions in
terms of commencement of proceedings; management of credit debtor’s
assets; reorganization; and creditor’s participation. The delivery is
measured in terms of time taken, insolvency cost, recovery rate and
outcome
• India jumped 33 ranks (136to103)in DBR ‘18
• After introduction of IBC the average time taken has reduced from 4.3
years to one year; insolvency cost has reduced to 1% from 9% and the
recovery has risen to 50% in 37 resolved cases against 26% in pre-IBC
regime
• Currently foreclosures are four times beyond resolutions because of long
stressed assets, but thing are expected to change when timely action is
taken

Ministry of Corporate Affairs, GoI 15


Lessons learnt: 1st Ordinance & Amendment Act
• The first Ordinance was promulgated in November 2017 to prevent
undesirable people from gaining or regaining control (section 29A)
• Section 29A is often misinterpreted as debarment of promoters; actually
applies to all resolution applicants and all persons acting jointly or in
concert and their connected persons and not promoter alone
• One month window of opportunity was given at the time of introduction to
remove disqualification by paying the overdue amount
• One year duration (from declaration of NPA to admission for CIRP) allowed
before becoming disqualification
• Other disqualifications

Ministry of Corporate Affairs, GoI 16


Lessons learnt: 2nd Ordinance and Amendment Act
• The 2nd Ordinance was promulgated in June 2018
• Fine-tuned section 29A (NPA, Conviction)
• Special dispensation for MSMEs
• Prohibited acceptance of late bids through regulations (Liberty House)
• Excluded guarantor to corporate debtor from the purview of moratorium
• Reduced voting threshold to 66% (from 75%)
• Withdrawal for out of court settlement allowed under certain circumstances
• Limitation Act applies
• IBBI given additional role to develop market for stressed assets

Ministry of Corporate Affairs, GoI 17


Lessons learnt: Other Acts modified
• Income tax law amended to allow adjustment of carry forward losses
and unabsorbed depreciation against book profit due to write down
of debt
• SEBI has amended its regulations to allow speedy de-listing provided
public shareholders given exit option at price not below liquidation
value; exempts acquirers from public offer and takeover code
obligations and permits reclassification of promoters as public
shareholders
• Competition law regulations tweaked to give approval for
combinations on fast track basis

Ministry of Corporate Affairs, GoI 18


Path forward….
• Excessive delays at admission stage: IU to be strengthened
• NCLAT ‘clock-stop’ principle in respect of litigation: Supreme Court
to settle law for timebound resolution
• Increasing case load: doubling member’s strength and strengthening
number and quality of support staff; introducing E-Courts; conducting
regular Colloquiums for NCLT and NCLAT members
• Regulation of registered Valuers on the lines of RPs
• Information asymmetry destroying value: CoC to put extra effort to
improve information collection and dissemination

Ministry of Corporate Affairs, GoI 19


Path forward….
• Auction process: while traditional auction may not be feasible because
resolution plan includes financial and non-financial parameters, but a two-
stage process of shortlisting and auction could be considered
• Going concern concept: IBC does not allow asset sale beyond 10%, but
jurisprudence is still evolving (Rcom case)
• Pre-packs: not permitted, but it can be examined; swiss challenge may be
an option; Project Shashakt
• Enterprise Group insolvency: universal problem
• Cross border insolvency; UNCITRAL preferred option; working in 44
jurisdictions; gives precedence to domestic law and public policy; robust
cooperation framework

Ministry of Corporate Affairs, GoI 20


Vision
Developing a world-class insolvency
framework and making India a globally
attractive market for investment in
distressed assets

Ministry of Corporate Affairs, GoI 21


THANK YOU

Ministry of Corporate Affairs, GoI 22