The gap between the IBC’s intended purpose and its real-world uses raises worries about the overall economic impact.

Amidst the pursuit of debt recovery, the banking sector is witnessing an erosion of public money. The collateral effects of Insolvency and Bankruptcy Code (IBC)-induced haircuts transpiring into loss of public funds poses profound implications that extend beyond financial ramifications to the stability and credibility of the entire banking system.

The Insolvency and Bankruptcy Code of 2016 regulates insolvency and bankruptcy proceedings for corporates and individuals. The National Company Law Tribunal (NCLT) is the adjudicating authority for IBC. “Haircut” refers to the reduction in the value of creditors’ claims during the resolution process of a company. It represents the percentage or amount by which creditors may have to accept a cut in their outstanding dues. The extent of haircuts is determined during the negotiation and approval of the resolution plan.

Over the last five years, observations of NCLT processes and the application of the IBC indicates a tilt towards favouring defaulting corporations rather than safeguarding the interests of creditors, who often employ public funds to support these large entities. This inclination to prioritise conglomerates over the individuals and using public money to rescue these corporations has become particularly significant in the aftermath of a global pandemic, where every nation has confronted economic challenges. The significant haircuts imposed on creditors amounts to  diversion of resources which could be deployed to drive the country’s progress and development. Key infrastructure developments, such as hospitals and educational institutions – foundational to societal progress – are being overshadowed.

Corporate gains, creditor’s loss?

Despite undergoing many amendments, today the IBC still grapples with operational challenges, raising questions about whether these issues stem from deliberate actions or procedural sluggishness. According to the Parliamentary Standing Committee’s 67th report that came out last month, only 25 to 30% of cases are being resolved. Notably, some cases take more than two years to culminate, leading to the erosion of asset value. One of the key findings of the report highlighted the limited capacity of the NCLT, which is currently operating at only 50% capacity, with 34 out of 62 member positions vacant and over 20,000 cases pending.

This deviation from the core values of the insolvency code is evident in high-profile cases like Videocon and Ruchi Soya, and the most recent case of Reliance Communications Infrastructure Ltd vs. State Bank of India, where creditors, mostly public sector banks, had to accept massive haircuts.

In December 2023, in the case of Rcom Vs. State Bank of India, the NCLT endorsed a resolution plan amounting to a mere Rs 455.9 crore. This figure starkly contrasts with the creditors’ claims totalling Rs 47,251 crore, symbolising an astounding 99% reduction in the creditors’ claims. At the time of its bankruptcy filing, RCom held a debt of Rs 46,000 crore from 53 financial creditors, including prominent Indian public sector banks such as State Bank of India, Syndicate Bank, Bank of Baroda and Punjab National Bank.

For Videocon Industries Limited, creditors were forced to accept a whopping reduction of 95.85% on their outstanding loans. Twin Star Technologies, a subsidiary of the Vedanta Group, offered only Rs 2,962 crore for Videocon Industries in exchange for the claims of 64,938 crore. This represents only 4.15 % of all creditors’ claims and a haircut of 95.85%.

Similarly, Ruchi Soya, a prominent defaulter in the Reserve Bank of India’s list, grappled with a massive debt burden, totalling around Rs 12,000 crore. Among its financial creditors, State Bank of India held the largest chunk of the debt at approximately Rs 1,800 crore (15% of the total debt), followed by Central Bank of India, Punjab National Bank and Standard Chartered Bank India. Patanjali Group acquired Ruchi Soya for a measly Rs 4,350 crore which is 36.25% of the total debt in 2019 through the insolvency process.

“The resolution value should stand out so that nobody can point a finger and say, ‘Oh my god, look at the banks. They have taken this kind of a haircut’… is that acceptable?” said Nirmala Sitharaman at the Insolvency and Bankruptcy Board of India (IBBI) Sixth Annual Day on 1st October, 2022, emphasising the unacceptability of 95% haircuts and significant delays in insolvency cases. Yet, recent trends indicate otherwise.

These scenarios raise questions about the alignment of current insolvency practices with the foundational principles of the code.The recovery rates have experienced a significant decline, dropping from 43% to 32% between March 2019 and September 2023. Concurrently, the average resolution time has surged from 324 to 653 days, exceeding the stipulated time frame of 330 days.

The code, which was intended to simplify insolvency processes and protect the interests of all stakeholders, falls short in practice. The gap between the IBC’s intended purpose and its real-world uses raises worries about the overall economic impact. Given the current trajectory, in which corporations are aided and abetted over crucial societal pillars, there needs to be an acknowledgement of the failure of the NCLT in addressing the NPA crisis. Thomas Franco, former general secretary of All India Bank Officers’ Confederation, says, “The NCLT has become the gateway for looting the banks and handing over companies to favourite corporates for a pittance without any accountability for the borrower or the bankers.” He emphasises the need for a fundamental rethinking.

This article is written as part of a collaboration between CFA and All India Bank Officers’ Confederation (AIBOC).

This article was originally published in The Wire and can be read here.

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