By PN Vijay
The Insolvency and Bankruptcy Code (IBC) was hailed as one of the most transformational reforms in India of modern day instances. It was meant to revive companies, guarantee preservation of assets and capital, and be fair to all the stakeholders. It was supposed to make performing company in India a lot less complicated such was the hope and hype that the planet applauded us and we catapulted from 108th rank in 2018 to 52nd in 2019 in the Ease of Doing Business Index.
Now, just after 3 years, most of us are much less convinced opinion is now swinging from the most charitable “it is still evolving” to a more blunt “a good law spoilt by terrible implementation”.
The numbers are disappointing. In terms of reviving and saving companies, up to December 2019, of the 3,312 circumstances referred for the CIRP (Corporate Insolvency Resolution Process), only 190 have been closed by resolution and a whopping 780 firms have been liquidated. Balance circumstances are either work in progress or have been withdrawn by mutual consent. This is a mortality price of 80%. In terms of lenders obtaining back their dollars, of the total 970 circumstances closed by liquidation or resolution, lenders recovered only Rs 1.73 lakh crore and took a haircut of a massive Rs 8.19 lakh crore.
Much was created about reviving a Bhushan Steel or a Monnet Ispat. However, these seven ‘poster boy’ circumstances of the 970 listed above account for just 1% of the total circumstances, although in terms of worth they are significantly greater. In terms of time taken, the 180-day period is seldom followed, and in truth the National Company Law Appellate Tribunal (NCLAT) and the Insolvency and Bankruptcy Board of India (IBBI) have had really harsh points to say about the inordinate and unacceptable delays.
Last but not the least, in terms of jobs lost and recovered, the figures are complicated to arrive at, but estimates are that about 1 million jobs have been lost due to the closure of organizations. So, in a nutshell, anecdotally, the Code has substantially failed in all the objectives it had set out for itself—to revive organizations, guard public dollars and preserve jobs.
Unsurprisingly, couple of ministers and officials speak about it these days, but surprisingly there is really small angst about the God that is failing.
Let us dive a bit deeper and analyse why “in spite of good intentions, the IBC has been the way to Hell”. In my view, the key purpose is the mindset of the lenders who are mostly government-owned banks, and in a couple of circumstances the private ones. These bankers have currently written-off these loans and, therefore, they are most reluctant to participate in a complicated revival strategy that calls for patience and frequently commitment of some working capital in brief, their attitude is “the quicker we kill this one and bury the corpse, the better”. The adverse threat-averse attitude of banks is, in my view, the most significant purpose for the failure of the IBC to provide.
The second purpose is the lack of knowledge amongst the resolution pros to carry out what is certainly a really complicated process of reviving a firm that has gone sick. Even for sector specialists and management gurus, reviving sick organizations is a challenge. And these gentlemen—RPs, as we contact them—are mainly organization secretaries with no or small information of how organizations run and make dollars, leave alone how to revive them the outcome has been a disaster. There is really small trust involving the current owners and the RPs, and the CIRP period degenerates into a period when the ‘sick’ organization is created sicker and sicker by the day.
It is pathetic to see how somewhat very good organizations are ‘killed’ by the RPs who have no clue how to deal with the circumstance. It is mentioned “war is too important a matter to be left to the generals”. Likewise, reviving organizations is also significant a matter to be left to the RPs whose only claim to fame has been to faithfully make agendas and minutes of Board meetings.
As if this was not sufficient to ‘get rid’ of a organization, there is the legal method which tends to make certain that even if a organization has some likelihood of revival, the inordinate delays make that virtually not possible. The lawmakers, in their infinite wisdom, decided that 180 days was sufficient to total a resolution approach and in intense case it can be 270 days. But, in actual practice, it is identified that the CIRP hardly ever ends in 180 days, and routinely goes beyond even 270 days. But who are we ‘lesser mortals’ to query the honourable judges who sit in the National Company Law Tribunal and routinely give adjournments?
The former Chief Justice, in his really initial speech just after joining the Rajya Sabha, lamented that the judicial method in India has collapsed. This is one more instance of that collapse. No wonder, each and every investor who overflies India and lands in China or Vietnam has only one lament—the Indian judicial method can in no way enforce contracts. The IBC is a victim of this malaise.
Is there is a option or do we philosophically accept this failure as one of the numerous malaises of a method that can not implement its personal laws? I am an optimist and think that points can be performed to attain the mission that the IBC set for itself.
We want to get the lenders to commit to the revival approach. The Ministry of Finance and the Reserve Bank of India (RBI) ought to haul up bank chiefs and inform them that their overall performance is going to be judged on their capacity to revive organizations in the CIRP and bring back public dollars and jobs in brief “read the Riot Act to the Bank CEOs”.
Secondly, we want to enormously strengthen the RP method we could—where the loans involved are more than Rs 5 crore—have a group of RPs appointed which could incorporate management consultants, technical specialists and so forth.
Thirdly, we should get the Supreme Court to set really effectively-defined timelines to the judges who sit in the NCLT to choose troubles inside the 180-day time-frame set by law. We all have been clamouring for a bankruptcy law for numerous years in seminar halls we got one but have messed up with the implementation. Let us attempt and set it correct.
The author is an investment banker and ex-convenor of the BJP Central Economic Cell. Views are private