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Destressing the Banking and Corporate Sector

 

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Till a few years ago, India was looked unfavourably for resolution of insolvency and bankruptcy. According to the World Bank, it took 4.3 years to resolve insolvency in India which was high when compared to countries such as Singapore (0.8 years), United Kingdom (1 year), United States (1 year), Indonesia (1.1 years), and South Africa (2 years). 

The Insolvency and Bankruptcy Code, 2016 changed this landscape by putting in place a framework that provides a timebound resolution of stressed companies. Under the Code, stressed companies can be resolved within 180 days (can be extended to 270 days), through a bidding process. In case creditors of the stressed company are unsatisfied or the process is not completed within the stipulated time, the company will be liquidated. 

The law has created a cadre of specialised insolvency professionals (akin to chartered accountants and company secretaries) capable of managing the process. Further, the process is overseen by the newly created National Company Law Tribunal (NCLT) resulting in expeditious disposal of cases owing to expertise and lack of backlogs. 

The central government has taken various steps to improve the functioning of the law and ensure that a robust system is created in India for resolution of sick companies and easy exit for businesses. In June this year, the Reserve Bank of India (RBI) released a revised circular outlining the process to be followed by banks to classify stressed assets. This circular reversed a much-criticised clause which required loans to be classified as bad debt if the borrower defaulted in repayment by a day. The revised circular provides a 30-day review period from the day of default during which lenders may decide on whether a resolution plan should be implemented or whether legal proceedings should be initiated against the defaulter. The circular also specifies a threshold for approving resolution plans, and dates by when banks should decide on a course of action. 

Despite the mandated 270-day time limit specified in the Code, certain cases have taken over 500 days under the resolution process. This is because the time taken by the NCLT or other judicial bodies is not included while calculating the time limit. To further strengthen the resolution framework, Parliament passed a law in August 2019 which seeks to increase the time-limit from 270 to 330 days. This period will include the time taken in legal proceedings or extensions granted by judicial bodies. Cases that breach the new 330-day limit will automatically proceed towards liquidation. 

The amendment also introduces certain other changes, which include strengthening the position and treatment of operational creditors during the resolution process. This has been done by mandating that such creditors (which may include contractual staff, stationery suppliers, or housekeeping service providers) receive at least the amount they would have received if the company was to be liquidated. 

The implementation of the framework is constantly being monitored by the government, and steps being taken to reinforce its provisions. Coordinated efforts between various agencies, regulators, and the central bank seek to ensure that a robust resolution framework is created in India. This will ensure that distressed companies get suitable buyers, and banks are able to recover their dues with minimal haircuts. Companies undergoing insolvency resolution provide ample opportunities across sectors and states to investors willing to expand their operations or diversify their portfolio. The Code will go a long way in making it easier to do business in India. 

The Financial Investors Initiative at Invest India focuses on facilitating institutional investors to invest in the country, support in policy analysis and handhold during their investment journey. This includes identification, promotion and facilitation of investor interest for resolution of insolvency.