Both Houses of the Indian Parliament have passed the long-awaited Insolvency and Bankruptcy Code 2016. The Code sets out a legal framework for resolving insolvency of companies and individuals. This should make it easier for ailing companies to exit operations and for creditors to recover their dues in a timely manner. However, according to brokerages, the new law may not help banks in faster resolution of existing cases; it may take few more years to feel its effects.
"While we do not rule out the long-term benefits of a strong bankruptcy code for banks, bond markets and companies, we do not see any near or medium term benefits either as delays stemming from want of accurate and timely information and inefficient adjudicatory mechanisms, would take three-five years to resolve," says Religare Capital Markets Ltd, in a research note.
Nomura feels the new Code would be very positive for financial sector reforms. However, it added, "The full implementation of the Bankruptcy code is expected to take time, as the entire institutional structure around dealing with bankruptcy - insolvency professionals, insolvency professional agencies, information utilities and setting up of the bankruptcy board - needs to be established. Until the Board is set up, the Code provides that a financial sector regulator, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) will act as an interim regulator."
The Code will consolidate the existing framework by repealing two Acts and amending 11 others including Companies Act, 2013, Debt Recovery Tribunal (DRT) Act, 1993, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.
Currently, there are multiple laws dealing with insolvency, which lead to delays from overlapping jurisdictions of laws and a lack of clarity in their provisions. India currently ranks 136 in the World Bank's resolving insolvency ranking; it takes 4.3 years to resolve insolvency and the recovery rate (at 25.7 cents to a dollar) is very low. The DRTs have several pending cases at present, which is affecting the recovery and faster resolution of issues.
The Code proposes to set up two adjudicating authorities to hear and dispose cases by or against the debtor:
The Debt Recovery Tribunal (DRT): The DRT will have jurisdiction over individuals and unlimited liability partnership firms.
The National Company Law Tribunal (NCLT): The NCLT shall be the adjudicating authority with jurisdiction over companies and limited liability entities. All powers under all bankruptcy related regulation will be granted to NCLT.
The new Code also widens the definition of sick companies. At present to qualify as sick, a company has to be registered for a minimum period of five years in which at the end of any financial year, the accumulated losses have to be equal to or exceed its entire net worth. These requirements have been done away with and sickness has been linked to the event of default of payment by the company to its operational creditors, including workmen and employees whose past payments are due.
"Therefore, a consolidated legal framework for resolving bankruptcy will play a key role in improving the ease of doing business in India. Additionally, this will be a big positive for the banking sector, as the Code gives banks (creditors) a legal path for recovering their dues in a time-bound manner," Nomura says.
According to Religare, at present there are two burning issues with the current bankruptcy laws or procedures. It says, "The current legislations and procedures are fraught with delays largely on account of lack of timeliness and accuracy of information on existing debt, collaterals against debt and other charges against the borrower and inefficient adjudicatory mechanisms like shortage of manpower in courts, stay orders and backlog of cases."
"For timeliness and accuracy of information, the role of information utilities (IUs) is very critical. IUs will work like a credit bureau for non-individuals and will hold all information (financial or operational) on firms at all times. The Parliament joint committee in its report highlighted that the timeline of 180 days for resolution of bankruptcy proceedings is difficult to meet unless IUs become fully operational with all set of information," the report added.
The research note says, considerable time will be lost in the establishment of a regulator for insolvency professionals (IPs) and IUs, as well as increasing the number and strength of National Company Law Tribunals (NCLTs). In addition, many procedural details on the working of IPs, IUs and other rules would be drafted by the regulator, which would take further time. "In view of the above, we see benefits flowing in after 3-5 years from now, and that too depending on the execution and effectiveness of the judiciary. Our interaction with lawyers confirms our view," Religare said.
The new Code will bring some important changes, like...
(a) There will be a strict timeline of 180 days (90 days for special cases) for resolution
(b) The Insolvency Resolution process (IRP) has to be approved by a majority of 75% of creditors as against current rules that require approval of 60% by value and 50% by the number of creditors.
(c) Any financial (in case of default)/operational creditor (in case of non-payment of dues) can initiate the IRP.
(d) The Role of IPs and IUs has been defined, which will bring a higher degree of professionalism in the insolvency process.