IBC: Hope floats, but long way from perfection

Over the last few months, industry experts have tried to defend the much-maligned Insolvency and Bankruptcy Code (IBC) by suggesting that the law has been going through a testing phase and things would settle down in the long-term.

The volume of litigations and reasons for them have overwhelmed policy makers, Committee of Creditors, and Resolution Professionals alike. Decision-making has been left to the National Company Law Tribunal (NCLT), resulting in a constant return to court for direction on the way forward.

If the first 12 companies referred for bankruptcy resolution under the IBC are considered to be a start of a cricket Test match, then the IBC appears to be a technically inept batsman struggling to connect with the ball on a green pitch under dark clouds.

What is important in such situations—both on the cricket pitch and off it—is making sure the tricky period is seen through. Last Friday, the IBC had its first success, and finally it appears that there is hope for India’s bankruptcy resolution process.

The company with the largest amount of debt, Bhushan Steel—which had a debt of Rs 44,478 crore—was acquired by Tata Steel under the IBC process. Not only did the lenders recoup Rs 35,200 crore through Tata Steel’s resolution plan, they also got a 12% stake in a company which could soon turn around with efforts of the Tata Group. Operational creditors will get Rs 1,200 crore over the next 12 months, meaning Tata Steel will eventually spend Rs 36,400 crore for Bhushan Steel.

Industry and politicians alike have hailed the development. “For the first time, such a large loan resolution has been achieved through upfront payment received by banks through sale of a company,” said Piyush Goyal, who took additional charge as Minister of Finance last week. “This is a record step towards resolving the legacy of unprecedented amount of bad bank loans inherited by this government.” Goyal will be the Minister of Finance till Arun Jaitley recovers from a kidney transplant surgery.

Goyal’s optimism was shared by ratings agency S&P Global Ratings too. “Tata Steel’s takeover of Bhushan Steel affirms India’s fledgling bankruptcy law and has positive implications for resolving other stressed assets in the Indian banking system,” the agency said in a note. “The case was resolved in just 10 months... Under the new law, resolution of bankruptcy must be completed in 270 days. S&P Global Ratings believes a time-bound resolution is a positive development for India's business environment. The previous open-ended resolution framework allowed vested interests to perpetually delay bankruptcy proceedings.”

While it is indeed a moment to be celebrated, policy-makers would do well not to get carried away in the euphoria. Even the Bhushan Steel resolution faced, and continues to face, litigation. It is just the judiciary, in this case the National Company Law Appellate Tribunal, who decided that process will not be stalled for the sake of litigation. On Monday, the NCLAT decided not to put a stay on the acquisition of Bhushan Steel by Tata Steel even though it continues to hear pleas of former promoter Neeraj Singhal and operational creditor L&T. The litigants can move the Supreme Court after the NCLAT.

To its credit, the government is listening and trying to adapt as fast as possible in an administrative system such as India. On March 21, after UltraTech Cement sought to buy the bankrupt Binani Cements outside the ambit of the IBC, Fortune India wrote that perhaps the government could look at the option of online auctions when finding a new buyer for bankrupt companies to avoid unnecessary litigation and late bids. The idea has slowly gathered momentum. In April, an official from JSW Steel told Moneycontrol that the resolution for Essar Steel should be done through online auctions. Liberty House’s executive chairman Sanjeev Gupta told Fortune India, “Online auctions could be a good way to bring in transparency to the IBC and reduce litigation. One could just get in bid and get out if they are unsuccessful.”

The idea of online auctions has its sceptics too as many believe that the IBC’s objective not just to maximise returns for banks but also to turnaround the bankrupt company. Yet, according to a report in The Times of India, the government is now considering a hybrid system of online auctions after technical qualification for the IBC process. According to the report, the top three qualifiers in the technical round would be asked to bid online in a transparent manner.

The Insolvency Law Committee has also addressed the other contentious issue of Section 29A, which bars former promoters not being able to bid for their bankrupt companies. Concerns emerged after industry experts suggested that this might mean there would be no takers for micro, small, and medium enterprises (MSME). The Insolvency Law Committee suggests that Section 29A of the IBC be excused for MSMEs.

Several other issues remain unanswered and ambiguous. For example, there is no clarity on whether a bankrupt company can seek a resolution outside the NCLT process. There is no direction on how to solve a divided opinion amongst the committee of creditors, and resolution professionals are still open to litigation from all quarters, including former promoters, bidders, and even vendors of the bankrupt company.

Thus, while the Tata Steel acquisition of Bhushan Steel shows what the IBC can really achieve, to suggest that all is good with law will be a mistake. To get back to the cricketing analogy, the IBC has just seen through first session of the first morning of a Test match after facing a barrage of bouncers, outswingers, and inswingers. Rather than get carried away in celebrations, now is the time to remain cautious and fix the mistakes of the past.