Why the RBI and IBBI Need to Work Together to Effectively Handle the Resolution of Stressed Assets

[Anirudh Gotety is a 4th year student pursuing B. B. A., LL. B. (Business Law Honours) at National Law University, Jodhpur. He can be contacted at [email protected]]

The introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC”) has led to a paradigm shift in the debt recovery mechanism in India. The IBC was a much-needed legislation given the plethora of central and state laws that governed different aspects of the process. The IBC repealed most of the earlier laws which dealt with the subject. It also has a non-obstante clause[1] to handle conflicts with other laws and stipulates a moratorium on any other proceedings once proceedings under the IBC have commenced.[2] The supremacy of the IBC has been upheld by the Supreme Court of India.[3]

Although the IBC prevails when proceedings are commenced under it, it contains nothing to mandate that an application is made under the IBC in the first place. Therefore, creditors enjoy other options as well. For example, secured creditors may choose to enforce their security through the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. When banks lend under a consortium or multiple-banking arrangement, the Reserve Bank of India (“RBI”) still requires banks to form a Joint Lender Forum (“JLF”). The JLF has reach a corrective action plan and implement it by a majority vote. However, proceedings under IBC would still prevail if a creditor were to initiate them in either case.[4]

The restructuring process of the JLF involves a techno-economic viability study (“TEV”) which involves an independent evaluation committee evaluating various parameters such as debt equity ratio, debt service coverage ratio, liquidity/current ratio, and the like, to ensure that the terms of the restructuring are fair to the lenders. A similar TEV is expected to be carried out in cases of other norms of the RBI such as the Scheme for Sustainable Structuring of Stressed Assets (“S4A”), Strategic Debt Restructuring (“SDR”), and Corporate Debt Restructuring (“CDR”). Each of these norms lays down a self-contained process through which such stressed assets can be restructured.

The Banking Regulation (Amendment) Ordinance promulgated in May 2017 added section 35AA to the Banking Regulation Act, 1949 that allowed the Central Government to authorise the RBI to issue directions to banks to initiate insolvency resolution proceedings under the IBC in cases of default. Acting on the amendment, through a press release dated June 13, 2017, the RBI signalled its intention to resolve all stressed assets using the IBC route. RBI’s pres release stated that 12 specific accounts had to be referred under the IBC immediately, whereas other accounts may be referred in the next six months if the banks cannot come up with a viable resolution plan under other mechanisms.

This clearly demonstrates that the RBI and the Government are reposing faith in the IBC to resolve all stressed assets, thus veering away from the mechanisms established under the RBI’s norms such as the CDR, SDR, S4A, etc. This seems to be the case because it is for the first time that there is a statutory backing for the restructuring and resolution process that applies to all creditors in a time bound manner.

However, the mechanisms the RBI norms rely on are seemingly absent in the IBC and the Insolvency and Bankruptcy Board of India’s regulations (“Regulations”) that govern the insolvency resolution process. For example, the TEV which is required to be carried out in the norms for restructuring is absent. Furthermore, the Regulations give a free hand to the insolvency professional (“IP”) to deal with the assets of the defaulter in any way he deems fit since the Regulations only provide a non-exhaustive list of measures that can be taken for resolution.[5] The absence of these mechanisms endemic to the RBI norms may lead to erosion of value and loss for creditors.

The question that naturally arises in these cases is what principles guide the IP, especially in the absence of such mechanisms in the Regulations and the IBC itself. This question and the potential problems would be even more pertinent in cases that involve very large non-performing assets (“NPAs”) like the ones the RBI asked the banks to refer to the IBC. Will it be the burden of the creditors and the committee of creditors to ensure that such diligence is carried out by the IP? There is certainly a need for the IBBI and RBI to coordinate in order to incorporate these mechanisms in the regulations that guide corporate insolvency resolution.

The half-hearted measures undertaken by the RBI to resolve these stressed assets with regard to the IBC also give rise to a number of questions. Why were only 12 accounts mandated to be referred by the RBI? Why were banks conferred discretion with regard to all other NPAs? The aim of the IBC is to maximise value for the creditors. Waiting six months to refer other accounts would delay the process and lead to erosion of value that the banks could salvage. Moreover, this shows that the RBI itself is unsure of the effectiveness of the IBC and is using these 12 accounts as a test case. In an ideal scenario, the RBI norms would be replaced by processes in the IBC so that there is a single window solution for all such cases.

– Anirudh Gotety

[1] Section 238, Insolvency and Bankruptcy Code, 2016.

[2] According to section 14 of the IBC, once a petition is admitted by the NCLT, no action shall be brought against the corporate debtor during the continuance of the insolvency resolution proceedings.

[3] Innoventive Industries Ltd v ICICI Bank and Ors,  2017 (11) SCALE 4.

[4] See NCLAT’s judgment in Starlog Industries Ltd. v ICICI Bank Ltd, [2017] 142 SCL 1.

[5] Regulation 37, Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

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