The Ministry of Corporate Affairs (MCA) will soon begin consultation with the Reserve Bank of India (RBI) and the Department of Financial Services for the proposed code of conduct for the committee of creditors in insolvency resolution cases.

On September 24, The Insolvency and Bankruptcy Board of India (IBBI) approved a code of conduct for banks and financial institutions, which form the committee of creditors (CoCs) in insolvency matters, after a rap from both the National Company Law Tribunal as well as the Parliamentary Standing Committee on Finance on recent instances of deep haircuts taken by COCs and decisions in contravention to the provisions of the Insolvency and Bankruptcy Code, 2016.

“Stakeholder consultation will begin the moment IBBI sends the approved code of conduct to us. We will begin consultations with RBI and the Department of Financial Services since any regulation for banks needs to be deliberated with the central bank as well,” a top source in the MCA told Fortune India.

The government will either notify the code of conduct for lenders under IBBI regulations or bring an amendment to the IBC Law.

In August, the Parliamentary Standing Committee on Finance, headed by former minister of state (finance) Jayant Sinha, made a strong remark on the deep haircuts being taken by the committee of creditors and called for a code for creditors to “define and circumscribe their decisions as these have larger implications for the efficacy of the IBC”.

One of the examples of lenders taking a deep haircut relates to the Videocon insolvency matter in which the State Bank of India-led committee of creditors agreed for a 95.85% haircut while approving the ₹2,962-crore resolution plan offered by Vedanta group firm Twin Star Technologies against the total admitted claim of ₹64,838 crore. The Mumbai bench of the NCLT, while approving the plan on June 8, had remarked whether banks were taking a haircut or a complete shave.

Now, SBI has approached the adjudicating authority with a plea for rebidding in the matter as the bid value of Twin Star for Videocon industries is too low.

Similarly, the Chennai bench of the NCLT last month ordered liquidation of Siva Industries, rejecting the settlement plea of lenders accepting ₹328.21 crore against admitted claims of ₹4,863.87 crore (a 93.5% haircut). The bench said it will prefer to follow its judicial wisdom than commercial wisdom of the committee of creditors.

According to experts, a set of mere guidelines to regulate the role of the committee of creditors will not work unless there is statutory backing to enforce the provisions.

“To say there will be a code of conduct coming through IBC is a mismatch, these two cannot be reconciled. The functions of CoC can be amended in IBC,” said Shardul Shroff, chairman, CII task force on IBC, during a webinar on five years of IBC law held in August.

“In the entire insolvency ecosystem, every constituent, be it the insolvency professional, IBBI, or valuers, are all guided by a set of statutory regulations. It is only the committee of creditors that is not bound by any regulations,” Sandeep Kr. Bhatt, director, Shrea Insolvency Professionals Pvt. Ltd., told Fortune India. “The proposed code is merely a set of guiding principles. The need of the hour is to define the deliverable of the CoC in the context of insolvency under the RBI Act. IBBI does not have any authority on banks.”

It may be noted that in the five-year history of the insolvency law, out of the total 400 major resolution cases, recovery has been to the tune of ₹2.5 lakh crore, with a 60% haircut. Officials, meanwhile, are quick to point out that the recovered value in major resolution matters is almost 180% of the liquidation value of debtors.

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