[Tushar Kumar is a 4th Year BA LLB (Hons.) student at Dr. Ram Manohar Lohiya National Law University, Lucknow]
The Ministry of Finance, in July 2018, accepted the recommendations of a committee constituted for review on Non-Performing Assets of Public Sector Banks, headed by Sunil Mehta (Non-Executive Chairman of Punjab National Bank) proposing “Project Sashakt”, calling for a five-tier approach to resolving the situation of Non Performing Assets of Indian Banks, in concurrence with the already existing mechanism under the Insolvency and Bankruptcy Code, 2016 (the “IBC”). Launched with the objective of restructuring the stressed assets in the banking sector, the project, however, is just a redundant step in the insolvency mechanism of the IBC. The measures devised under the project are devoid of intervention from either the court or the government.
The major problem lies in the fact that these measures can be opted for by the creditors without going to any judicial forum. Even under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the “SARFAESI Act”), creditors or financial institutions have powers to take over assets and recover loans without the intervention of the court. However, the success rate for the creditors who sought relief under the SARFAESI Act has been astonishingly low. To curb this situation, the IBC was enacted in 2016 to plug the gap in the insolvency process pertaining to situations wherein the debtors did not have sufficient assets to satisfy the claims of the creditors. The establishment of remedies as well as bodies running parallel to the remedies and bodies under the IBC would jeopardize the insolvency process and prove to be detrimental to the IBC’s credibility in the long run. Moreover, the project encompasses measures and their completion within a stipulated time period which, if not successful, would give the option to creditors to resort to the procedure under the IBC, thereby making the whole process inefficient and time consuming.
The project entails a Fast Track Debt Resolution Programme, which is segmented into five tiers and involves the assistance of asset management companies (“AMCs”). The first tier, meant for small and medium enterprises covering loans below ₹50 crore, prescribes the constitution of a steering committee which has to complete the resolution process within 90 days. The modes that would be employed by the steering committee to recover the debt as well as its composition are yet unclear. What remains to be known is the situation wherein some of the banks are not willing to resort to the mechanism under the first tier, rather the Fast Track Corporate Insolvency Process under the IBC. This would result in the unnecessary fragmentation of the insolvency process.
The second tier, titled as the Bank Led Resolution Approach (“BLRA”) in the form of a pre-IBC measure, covers bad loans in the range of ₹50 – ₹500 crores. Herein, too much autonomy is granted to the lead bank, which will be authorised to take decisions after an inter-creditor agreement is signed by the financial institutions in this regard. The lead bank has the right to formulate the resolution plan and place it before the consortium of lenders. Under section 30 of the IBC, the resolution applicant submits the resolution plan which is first examined by the resolution professional to the extent that the plan conforms to the order of the priority of repayment of debts under section 30(2). Only then does the RP present the plan to the committee of creditors, which then requires the requisite approval of the financial creditors. On the contrary, under BLRA, even though the revival plan has to be approved by 66% of the consortium of banks and financial institutions, the possibility of the lead bank skewing the resolution plan in its favour cannot be put aside. There is a possibility of emergence of disputes amongst the banks whereby bigger banks, having good collateral or loan facilities, suppress the interests of the smaller banks.
Additionally, the aforesaid procedure has to be completed within 180 days; otherwise it goes to the National Company Law Tribunal (“NCLT”) for initiation of procedure under the IBC. The added stipulated time of 180 days in addition to the 180 days (which can be extended by 90 days) already prescribed under the Code, makes the insolvency procedure more cumbersome, increases the possibility of reduction in the value of assets and poses a threat to the objective of the IBC, i.e. to complete the insolvency resolution process in a time bound manner.
The third tier, covering the bracket of bad loans ranging from ₹500 crores and above, pertains to the framework of an asset management company (AMC)/ asset reconstruction company (ARC), which will take over the bad loans or stressed assets of the respective banks and pay in cash and/or security receipts redeemable over a period of time. The AMC/ARC machinery has not been successful in India owing to numerous reasons, one being the huge amount of time taken by the ARC to realise the value of the stressed asset, another being the scarcity of investors as far as the market for security receipts are concerned, eventually resulting in the banks being the sole buyers of the security receipts issued to them by ARCs, on redemption.
Another reason is the price at which the stressed assets are to be taken over by the corporation, leading to discord between the banks and reconstruction companies. The lack of a mature and investor friendly market in trading of stressed assets is one of the predominant reasons of mounting non-performing assets in the banking sector. The same could not be resolved by a measure which goes back to the root of the problem. The measure also entails creation of an alternate investment fund (AIF) which will help the ARCs in buying the stressed assets of the banks.
However, what still remains in the dark is the question, who will invest in these Investment Funds? Neither the domestic investors nor the overseas investors are expected to invest in these funds, considering the approach of the Government to tackle bad loans owing to the various amendments and litigation under the IBC, resulting in lack of investor confidence. Lack of investment to fund the financing of the purchase of these assets would still remain a major concern.
The fourth tier is applicable when the first three pre-IBC measures are exhausted and unsuccessful. If the insolvency resolution is not successful through the first three tiers, the project envisages the NCLT approach under the IBC. The fifth tier is nothing but calling for an open market trading of stressed assets, which can happen even simultaneously while the case is pending before the NCLT.
On paper, the approach to streamline the stressed assets of banks into a single reconstruction company and then auctioning it off in open market seems cogent. However, the approach is marred by impractical considerations. Even though the process under the IBC is time consuming, it has still ameliorated the stressed assets situation in India leading to acquisition of corporate debtors by many corporations willing to put on board their own management to turn around the financial well-being of the stressed company. The unprecedented improvement in the rank of India in World Bank’s Ease of Doing Business from 130 to 100 recently is a proof of the positive impact made by the IBC in the insolvency resolution process. Instead of proposing a safeguard measure to escape the procedure of the IBC, the legislature should work on making the legislation devoid of any loopholes and making necessary amendments. The process, even though being court-driven and time-consuming, is a pragmatic solution to the endlessly mounting stressed assets of the banking sector. Moreover, the implementation of these pre-IBC measures and their possible failures would only delay the implementation of the NCLT approach under the IBC. It is in the best interests, therefore, that the IBC is allowed to function as the sole legislation for the resolution of insolvency process in India without any prior or parallel mechanisms to hamper its implementation.
– Tushar Kumar
 Insolvency and Bankruptcy Code, 2016, Chapter IV.
 Insolvency and Bankruptcy Code, 2016, section 12(1).