A Towering Modinomics Feat: Why the Insolvency and Bankruptcy Code is among Modi 2.0's biggest achievements
If there is one reform that exemplifies Modinomics in all its glory, it is the Insolvency and Bankruptcy Code (IBC) 2016.
The Code was passed by Parliament under the Narendra Modi government in May 2016, and became effective in December 2016, after subsuming and repealing the Presidency Towns Insolvency Act, 1909, and Sick Industrial Companies (Special Provisions) Repeal Act, 2003, among others.
IBC has helped bankers to solve with greater alacrity cases such as Bhushan Steel, Electrosteel and many more, including Essar Steel, which had been languishing in the bankruptcy courts for over 700 days. It is precisely to curtail the resolution period and prevent wily promoters to defraud lenders under the guise of endless litigations. The Narendra Modi cabinet on July 17, 2019, passed seven amendments to the IBC, making some much-needed changes in the recent order of the National Company Law Appellate Tribunal (NCLAT).
The last word on Essar Steel is yet to be spoken. But the fact that the Ruias, who were reportedly happily tom-tomming their bankruptcy for years, have lost their company, despite wanting to shell out over Rs 54,000 crore, in response to Arcelor Mittal's Rs 42,000 crore, is a stinging reminder to crony capitalists who cocked a snook at many a bank that with Narendra Modi at the helm, honesty is the only policy.
The IBC amendments enhance the power of the Committee of Creditors (CoC) or the lenders while resolving non-performing assets (NPAs) at the NCLT. The amendments will effectively check the rulings of bankruptcy courts that undermine the power of the creditors and bankers.
Commercial considerations will drive the distribution of money realised and within the power of the CoC. Dissenting creditors and operational creditors have to accept the liquidation value or the sum offered in the resolution plan — whichever is higher. The amended IBC, which gives the highest priority to financial creditors and secured creditors in the hierarchy of payments, is a welcome step. This will help in preventing a repeat of the NCLAT ruling in the Essar Steel case, where, the court said, about 40% of the proceeds should go to the operational creditors. Strengthening of powers of the CoC in the distribution of resolution proceeds is expected to lend clarity, with the resolution plan binding on all governments and local authorities.
The amendments have increased the resolution period to 330 days as the maximum time allowed for bankruptcy resolution, including for litigation and other judicial processes — this is higher than the present period of 270 days for clearing a resolution plan, which, however, excluded the time spent on legal challenges by various parties from the time frame.
A timebound outer limit of 330 days that is sacrosanct is, hence, a big step forward.
The new law will also reduce a lot of doubt and nervousness amongst potential resolution applicants.
The new amendments will come as a relief to ArcelorMittal, which, after being declared the highest bidder for debt-laden Essar Steel, moved the Supreme Court against a part of the order of the NCLAT, dated July 4, 2019, which had ruled that the profit of Rs 3,495 crore generated during the Corporate Insolvency Resolution Process (CIRP) cannot be given to it. The appellate tribunal had held that the profit should be distributed among all the financial and operational creditors on a pro-rata basis of their claims.
The fact that the apex court has stayed the NCLAT ruling on the distribution of proceeds, which was challenged by the State Bank of India, one of the key lenders to Essar Steel, on July 16, is also something that cannot be missed.
The IBC gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority, making it fair to all concerned stakeholders.
The Hyderabad bench of NCLT approved in August 2017, an insolvency resolution plan for Synergies Dooray Automotive Limited (SDAL), which used to supply aluminium alloy wheels to global carmakers such as Ford, in the first-ever order issued under the IBC.
Visakhapatnam-based aluminium alloy wheels maker Synergies Castings Limited (SCL), a related party, would merge SDAL in a scheme of amalgamation as part of the insolvency resolution plan, as per the NCLT orders. While this case was admitted on January 23, 2017, the corporate debtor's (SDAL) petition seeking insolvency regulator under 30(6) and 31 of IBC, was resolved by August 2017, showcasing the speed of execution under the IBC.
The average recovery in the insolvency cases that saw resolution in the first two years of the IBC, has been to the tune of 46% — against just 26% under the earlier Board for Industrial and Financial Reconstruction (BIFR) regime, highlighting the effectiveness of the insolvency framework.
Till date, IBC has been a catalyst, directly or indirectly, for astounding recoveries to the tune of almost Rs 4 lakh crore of bad loans and assets that had turned sour. Four lakh crore is well over 1.5% of India's GDP and hence, IBC is — by far — a game-changing reform that has not only instilled fear among fraudulent borrowers to clean up their act, but more importantly, it has salvaged the balance sheets of banks that were groaning under NPAs, by aiding in recoveries.
The NPA crisis of public sector banks, inherited by the Modi government from the erstwhile Congress-led UPA regime, one that faces multiple graft allegations, has been one of the worst legacies of Nehruvian socialism. It took a tall leader like Narendra Modi to undo that festering damage by ensuring the institutional lending and corporate rescue frameworks are strengthened via the IBC — which has no room for the proverbial 'prodigal debtor'.