One of my friends, who used to be the CMD of a public sector bank, once narrated an interesting story. He said, when the financing of a project proposal was being considered, the MD and CEO of the borrowing company would visit the bank often and would promptly provide all information requested. He would also sound very polite and cooperative.

However, once the loan was disbursed, the calls for any further information and/or for expediting the payment of interest/repayment of instalment etc. were not attended. After the default, he just did not answer the calls and if answered, the standard (often curt) reply was that the company was working on it and as soon as possible his people would get back.

The Indian Bankruptcy Code legislated in 2016 seems to have changed that all.

Earlier despite the delays and defaults in interest and loan repayment, the promoter and/or the management continued to own the assets and run the business as they wished. Under the new IBC, once the case is admitted by the National Company Law Tribunal (NCLT) and the Insolvency Professional (IP) appointed, the promoters and/or the managers are dispossessed of the assets as well as the management. The board gets suspended and the IP (supposedly) manages the enterprise in the best interest of all its stakeholders. Lenders become de jure as also de facto owner of the assets.

Businesses go through cycles of ups and downs. When enterprises do not succeed they need to be either restructured or folded up.

In India, while starting an enterprise was difficult, closing down was nearly impossible as there was no exit policy. The IBC has facilitated that. It is now possible for creditors, both financial and operational, to take the company to the NCLT for winding up and thereafter it is dealt with under the provisions of IBC in a (specified) time-bound manner. In fact, even promoters and managers can take the enterprise to the NCLT for winding up.

The Indian business environment has transited from a kind of chakravyuh where it was possible to get in but near impossible to get out. There have been some cases of swift resolutions of failing companies, value and employment protection and encouraging fair decisions.

Apparently, the legislative provision of promoters and/or managers being dispossessed of assets and the right to manage has sent shivers down their spine. They were used to restructuring (CDR), strategic restructuring (S4), ever greening, and haircuts. Now they are at the receiving end and have to accept the verdict of NCLT.

This exit policy is likely to eradicate crony capitalism, gold plating, under and over invoicing, serial defaulters and lead to lower leveraging, responsible behaviour and above all better allocation of capital.

The government and the legislators must be credited for bringing a about very thoughtful legislation, which substantially closes the escape routes and also lays down a water tight time frame for disposal of the cases referred to NCLT. The lending scene and the business environment are undergoing a traumatic transformation.

India is one of the most litigant societies and its judicial system is beset with delays. While the jurisprudence of the IBC is developing, delays and confusion in some cases have started surfacing. In over 30 per cent of cases the 270-day timeline has been breached.

Despite the recently incorporated clause 29A through an ordinance, some promoters have managed to arrange proxy buyers of the asset at 20-40 per cent of the valuation and continue to manage the asset, from behind a veil. The market is abuzz with rumours of discredited promoters coming back to own and manage the asset officially through an arrangement with the proxy owners.

Some financial engineers are also bidding beyond their means, but after successfully acquiring the assets are unable to meet even the initial condition to fork out upfront money. If unchecked such practices along with delays in disposal are bound to disrupt the IBC process.

The ongoing tenacious litigations are proof of the ingenuity of the defaulting promoters, their advisors and legal eagles.

Further, in the absence of jurisprudence (because of the new law) different NCLTs are giving different rulings. These issues will get settled once the Supreme Court delivers its verdict on these cases but that will take at least a few more years.

Simultaneously, the Supreme Court could exercise its supervisory jurisdiction and organise a session for the briefing of NCLAT, which in turn should do a similar exercise with NCLTs under its jurisdiction, to bring about consistency in decision making in cases that are similar.

It is granted that each case is unique but the uniqueness should be established by facts and not weaved by a nexus of promoters, lawyers and advisors.

Some cases of insolvency professionals misusing their authority have also surfaced and swift action must be taken against such errant professionals.

If the glitches in the IBC process are not sorted out quickly then it could also go the way that the SARFAESI did where cases were settled out of court on the promoters’ terms.

I still remember an incident from my days as LIC Chairman when one chieftain of a mid-sized empire requested me to refer the case of his defaulting company to Board of Industrial and Financial Reconstruction (BIFR). This would have led to the discontinuance of all payments relating to debtors with the promoter continuing to manage the enterprise. Cases referred to the BIFR would remain unresolved for decades. I had to impolitely show him the door. Subsequent avatars of BIFR, SICA and SARFAESI, were no better. The IBC code has the potential to deliver. However, the teething troubles can be smoothed only through pragmatic governance by the IPs and Committee of Creditors and swift conclusion of the judicial processes.

The writer is former chairman, SEBI and LIC

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