"In developed countries where insolvency laws are matured, bank funding is available with a prior charge to meet the litigation costs as well as any urgent money required to revive the company."

Insolvency & Bankruptcy Code (IBC) has not just changed the way lenders are lending money but has altered the way promoters treat their liabilities. In less than three years, structural and cultural behavioural shifts are visible on both sides: lenders as well as borrowers. Though it’s just about three years that the law was enacted, several gaps remain and the government and judiciary are still plugging them. Overall it has brought new discipline in the ecosystem avers Rajesh Narain Gupta, managing partner of law firm SNG & Partners to Maulik Vyas. 

Edited excerpts:

As we are entering the third year of the IBC regime, what are the structural tweaks needed to make the process more robust and viable?
Initially, the IBC had its own challenges and shortcomings. The government has demonstrated a proactive approach by bringing successive amendments to the Code. Further, the  and Supreme Court through regular judicial pronouncements and interpretations have put IBC on a fast track mode.

As all of us know IBC is an evolving process and may witness changes to be consistent with the challenges which may surface. There is a strong need to have more benches for NCLT and also increase the number of judicial members. The delay before NCLT defeats the purpose of the code; reduces the chances of resolution and survival; pushes the companies to liquidation and sets a bad example in the domestic market as well as the global market.

The current structure is to further evolve to address the resolution process related to group companies as well as cross-border insolvency and liquidation. As per the current levels of stress in the sector and the quantum of companies involved, the IBC is bound to be subjected to a stress test at least for the immediate/medium term.

The IBC process needs support on M&A side as well as financial support coming from stressed funds, special opportunity funds and private equity players as well as lenders. It needs continuous attention of market players including investment bankers as well as the regulator. As is reflected in Sashakt report, a conducive environment, which holistically supports the IBC process with the creation of a market place having the participation of funds is critical.

It would be better if there is a separate tribunal for high-value cases say exceeding INR 500 crore to ensure expeditious disposal. It is common knowledge that the various NCLT courts, especially in Delhi and Mumbai, are cramped and overcrowded. There is a strong need for a proper and reasonable  as a very basic requirement.

Do you see any change in the manner with which the banks are now lending?
During the global meltdown in 2008, Indian banks believed that they are the strongest and are not subjected to risks. The truth is that in level playing fields, globally all the institutions are prone to the same risks and are expected to address similar challenges. Banks in India including branches of foreign banks have lost significant money for reasons owed to bad credit decisions; low level of enforceable security and no easy resolution coming from the then existing laws. On one hand, the banking industry has the gigantic problem of NPAs and potential NPAs while on the other hand there are challenges on the capital. Public sector banks as per published reports require a minimum infusion of Rs 30,000 crore as capital. NBFCs are struggling and are starved of capital. The large frauds committed by the corporates, the big issues around corporate governance and integrity of top officials have added fuel to the fire. Simultaneously the corporate and business houses are experiencing the threat of losing control on the companies under the IBC and for the financial frauds committed by several of them, the various government agencies including IT, ED, CBI, SFIO, EOW and SEBI are chasing them for the wrongdoings. Numbers of employees of public sector banks are facing enquiries before CVC. Suddenly, the industry has woken up at all levels to the need of high compliance and corporate governance to avoid the process under IBC as well as rigours of prosecution under the criminal laws. In this background, the banking industry is re-organising itself on issues like KYC, the profile of the borrower, credit rating, capability to repay, etc., leading to extra caution.

Since several companies in sectors are going through the process of IBC and may get revived, capital expenditure by such industries from short term to medium term may not be required. Therefore, for a large segment bank may not be required to fund towards the capital expense.

As per the current trend most of the banks wish to lend to the established corporate against adequate security or high goodwill of the corporates in India or their parent company outside India or a mix of both. Unfortunately, the entrepreneurship appears to be at its lowest so there are not many new industries which are being set-up.

The bank loans are likely to grow in the areas of chemicals; infrastructure including logistics, ports, airports, etc.; technology; renewable energy and selective textile industries. The consumer banking industry is undergoing a paradigm shift towards the digital platform which should continue to evolve to new heights. The consumer loans in retail banking are expected to grow as a major thrust area. There are many foreign banks which would continue to have a focus on trade finance. The banking industry is expected to experience a high degree of scrutiny by regulators so the overall approach is likely to be defensive.

In most cases, the statutory dues are bone of contentions by various government agencies. How do we settle a law for such dues?
If a company goes for liquidation the central and state government dues are treated at par with unsecured creditors. Accordingly, the statutory dues are inferior to secured creditors. Therefore, the dues payable towards insolvency resolution and liquidation costs, secured creditors and workmen have priority over the government dues.

However, the situation is different when there is a resolution. In the matter of Binani Industries Limited, NCLAT held that the objective of the IBC court is a resolution. The purpose of the resolution is for maximisation of the value of assets of the Corporate Debtors thereby for all the creditors. Needless to say that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor and therefore the preamble of the Code talks about revival and not liquidation.

When we talk of revival it implies that the corporate debtor is operational. In one of his addresses the Chairperson, NCLAT pointed out that the statutory dues have direct nexus with the operation of the corporate debtor. The NCLAT in the matter of Pr. Dr General of Income Tax Vs. M/s. Synergies Dorry Automobile Limited has held statutory dues under the income tax/ sales tax/  is part of the operative debt and hence statutory authorities will be treated as operational creditors. This is a landmark judgement putting all controversies on the matter at rest.

In cases of the entire group facing insolvency process (e.g. Videocon, Sterling Group) do you think the tribunals should take a pragmatic approach to divide or combine those assets for getting better valuations?

The IBC in its present form does not deal with the issues related to insolvency/ liquidation at the group level. The law is expected to be enacted particularly owed to the experiences in the matters of IL&FS, Videocon, Sterling Group, etc.

The global experience is that each corporate entity has its own existence. The corporate veil is rarely pierced depending upon the circumstance where the parent or affiliated company could be liable for its subsidiaries or affiliates. There is no straight jacket formula. Most of the courts in most of the countries including Australia, Canada, Germany, Kuwait, Singapore, UK and USA have laws, rules and regulations to deal with the situation arising or related to group insolvency. Thumb rule generally is that each corporate entity has its own existence. The exception and rare situation which may lead to group insolvency may arise for the reasons of fraud, intermingling or comingling of assets, wilful misconduct, contractual commitments, preferential transfer of assets, etc.

So, it is certainly important to bring appropriate legislation to deal with the group companies which may also compel the promoter to maintain a high standard of corporate governance for each company to ensure that in a stressed situation, the whole of the group is not subjected to regulatory and litigation risk.

Do you see any change in lending for the acquisition of distressed assets which are in insolvency?
The banks today do not seem to be proactive to lend money for the acquisition of distressed assets. The NBFCs have their own challenges. For the complete success of IBC and for the companies to revive, it is important that the entire marketplace and infrastructure is built which is complementary and paves way for the revival of the company on one hand and return on capital to the investors on the other hand while addressing the concerns of the creditors. It is important to understand that in such marketplace, the interest of each stakeholder which includes promoter, creditor, investor and shareholder is taken care of. The regulatory hurdles which deny or delay the infusion of capital need to be addressed. The interest of the investor, who is willing to invest in stressed asset opportunity must be protected by consistency in the government policies, particularly in infrastructure projects which include power, renewable energy and concession agreements around it. The sanctity of the contract and honouring the commitment on a long term basis especially by the government-owned institutions is non-negotiable. The trust of the investor cannot be broken which requires a strong commitment from the policymakers as well.

The lending in the acquisition of distressed assets is bound to increase provided there is a participation of the right set of investors on the equity side. The Sashakt report paves way for the creation of such marketplace by introducing a platform backed by AIFs. Certain ARCs are also expected to play their role.

In developed countries where insolvency laws are matured, bank funding is available with a prior charge to meet the litigation costs as well as any urgent money required to revive the company. In India, there is scepticism around this and banks will take time to fund till their risk is mitigated. The banking industry is and is likely to agree to haircuts, restructuring of debt, etc., as per the sanctioned resolution plan. Where sound corporates are acquiring the businesses/companies under IBC, the said investors shall definitely get bank funding based on their credentials.