The proposed amendments to the Insolvency and Bankruptcy Code (IBC) such as the committee of creditors getting explicit authority over the distribution of proceeds in the resolution process and a firm timeline that cases referred to the IBC should be resolved within 330 days have credit-positive implications for Indian banks, according to Moody’s Investors Service.

Referring to the committee of creditors getting explicit authority over the distribution of proceeds in the resolution process, the global credit rating agency observed that this maintains the accepted hierarchy of creditors.

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Essar Steel case

In a recent judgement in Essar Steel case, the insolvency court overruled the decision of the committee of creditors and stated that the resolution's proceeds should be equally distributed among all claimants, putting secured creditors on the same level as unsecured and operational creditors.

Essar Steel is the largest non-performing asset account currently in the IBC process, and the ruling could have had material implications for the recoveries of the banks involved, the rating agency said in a statement. “The case could also have set a precedent for upending the accepted creditor hierarchy because Indian banks predominantly engage in secured lending. The amendment will be applied with retroactive effect and will strengthen the case of secured creditors in the Essar Steel resolution,” it said.

Amendments

Moody's said the proposed amendment that cases referred to the IBC should be resolved within 330 days, including appeals is a credit positive for Indian banks because it will reduce resolution timelines. The agency elaborated, “Cases in the IBC have taken much longer to resolve than the originally envisaged 270 days, in large part because concerned parties have repeatedly appealed to the higher courts. However, the poor track record of resolving cases on time means that actual implementation will be required before the process can be said to have been definitively speeded up.”

Referring to the amendment that states that in cases where the creditors include homebuyers, the committee of creditors can approve the resolution process as long as more than 50 per cent of the homebuyers on the committee give their approval, Moody's said this amendment is credit positive for Indian banks because it will facilitate the resolution of real estate projects.

“Under the IBC, homebuyers in a real estate project are treated on a par with secured creditors, which means that their approval is required before the committee can approve the resolution plan. Because homebuyers in a large project are likely to be relatively numerous, obtaining the approval of all the affected homebuyers has proved a logistical challenge. With the proposed change, only the approval of a majority of those present will be required for the resolution to be approved,” the statement said.

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