Insolvency and Bankruptcy Code: Firms cope with changing landscape

Financial creditors till July had realised claims of approximately Rs 474 billion in 26 cases where resolution plans were submitted under the Insolvency and Bankruptcy Code (IBC) since its enactment. But the figure pales in comparison with the behavioural change that the Code has brought about. 

The borrowing and lending culture in the country appears to have changed for good. Borrowers are scrambling to settle their loans, selling assets to bring down debt, all with the sole aim of staying outside the ambit of the National Company Law Tribunal (NCLT).

"In the current environment, debt is a stigma," the chief financial officer of a company, who is selling assets to bring down debt, said.

Devidas Banerji, partner, Khaitan & Co, said, "We are seeing some very large corporates selling assets for infusing liquidity."

Another marked shift is to take loans when absolutely necessary. Some companies who have just made it out of the bad loan list, have decided not to go for fresh debt. "Where the amount is not huge, we have decided to fund expansion through internal accruals,” an official of the company said.

Also, there are a whole lot of companies who are coming forward with restructuring proposals.

"Promoters now want to remain in touch with the banks. Earlier, there was more leeway in the system. Now, there is a fear of losing control," Pallav Mohapatra, managing director and chief executive officer, Central Bank of India, said, explaining the behavioural change.

Mrutyunjay Mahapatra, MD & CEO of Syndicate Bank, also said that the bankruptcy code was being seen as a threat of losing the company one has built on his or her own. "This is prompting many people to come forward and negotiate on terms that are more acceptable than the past,” he said.

The timeline for cases where debt was more than Rs 20 billion is over. But Pallav Mohapatra said, for cases where the debt is less than Rs 20 billion, people were coming forward with restructuring plans even though there was no reference date from the Reserve Bank of India (RBI).

"We have said that if the plan is viable and it gets the requisite rating, we will look at it favourably. But banks are very clear, they will consider restructuring outside NCLT only if the plan is viable or else it will be settled in the NCLT," he added. 
A few companies on the Reserve Bank of India's (RBI's) second list, however, are still trying for an out-of-NCLT settlement. At least one steel company has settled 45 per cent of the debt and is now in discussion for settling the balance of the Rs 34 billion of debt.

The tool that is working in favour of banks is Section 29A, which practically bars defaulting companies from submitting resolution plans unless they pay overdues.

“NCLT is being considered to be a revolutionary step in resolving NPAs and the modification of Section 29A is going to work wonders for bankers. Certain players, who are likely to default, are feeling threatened. Serious promoters would not want their units to go away from their hand. Because of Section 29A, those who are sitting on the fence are coming to banks to settle their dues. They are also bringing in some partners with them. We have come across a few such cases, where promoters who were not listening to bankers till a few months back now coming to bank for settlement. Banks are no longer cash cows for them,” Ashok Pradhan, MD and CEO, United Bank of India, said.

But overall, there is a sea change in the way a company operates.

Banerji said the financial discipline has increased significantly among companies because the threshold for insolvency is a nominal amount of Rs 100,000. “So, whenever there is a dispute, parties are trying to negotiate and settle the dispute with operational creditors. If there is a dispute, then the NCLT will not accept an application,” he explained.

  • Large corporates selling assets for infusing liquidity
  • Funding smaller expansion through internal accruals
  • Approaching banks for settlement on terms acceptable to the lender

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