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

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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
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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

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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%

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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

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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

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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

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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
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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

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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)

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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
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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)

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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

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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

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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

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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

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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

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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

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

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THANK YOU

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