The insolvency process is new to India. What do you think of the process, as opposed to global practices?
The NCLT process rolled out recently is a definitive step towards addressing the bulging debt crisis in India. This big problem has been raging in some key sectors for a few years. Indian corporate debt is estimated to be over 55 per cent of Gross Domestic Product (GDP). Non-performing loans to corporates account for about 10 per cent of GDP. This is way past what should be considered a crisis.
In India, development of the eco-system around the NCLT initiative needs further thought. The future rhythm will be defined by the type of success achieved on the first 12 cases (the major ones referred to NCLT by Reserve Bank order). Creditors will need to be very closely engaged in the resolution and recovery process; companies
that go through the NCLT-led resolution and restructuring will need to tread a very disciplined path. Each involved and affected stakeholder will have a steep uphill climb ahead to get back to stability. We (also) need to be prepared and patient for that sort of after-care, what I imagine would be a period of four or five years.
What do you think of the IBC amendments barring promoters from bidding?
Unless deemed a wilful defaulter, I believe it might not be in the best interest of the lender to outrightly debar or disqualify the promoter. A more agreeable solution could be to ensure any resolution led or proposed by a promoter be subject to more rigorous checks and balances. Or that they may be set a somewhat different hurdle on the evaluation criteria. What’s the point of reducing the recovery value of these assets, where such enormous amounts of public money is at risk? Most promoters might have genuine interest in turning the business back to profit; we should not undermine their intent or understanding of the business they’ve been most intimately associated with.
In the case of a few prominent stressed assets, it might be worthwhile for the lenders to hold an open auction. I have been part of mega auctions in the past — in Ukraine, Russia, Turkey, Colombia, Egypt and elsewhere — and believe that when correctly undertaken and executed, open auctions can yield good results.
Good work has been done by lenders in drumming up quite an interest for these assets. Financial investors and strategic challengers, both in India and abroad, have equally expressed an interest to participate in the process. The few NCLT cases that have generated enough and multiple interest could be considered for a transparent and open auction.
Finally, we should be prepared that some of the NCLT-based resolution efforts might not succeed or not yield the expected results. In such a case, it could be worthwhile to consider parcelling these assets into a TARP-like (the American law on this) asset management structure. The US has employed this mechanism very effectively. The assets would still require life-saving treatment and even though liquidation is permissible under the NCLT framework, this should be avoided at all costs.
Is the Insolvency and Bankruptcy Code (IBC) the best way to deal with stressed assets?
It is a step in the right direction. The Code will have to be augmented by reforms in many correlated sectors. The most effective way to deal with the current stressed asset situation is in the creation of a comprehensive and multifaceted resolution framework, and its effective enforcement, within which stakeholders are allowed some flexibility for customisation.