Insolvency and Bankruptcy code was framed in response to longstanding economic challenges related to corporate insolvency and bankruptcy in India. However, its implementation was fraught with several shortcomings. Discuss. (09-01-2024)

·         Ineffectiveness of Resolution Plans

·         Low Recovery Rates and Haircuts

·         Favorable Treatment for Corporate Defaulters

·         Inadequate Realization for Creditors

·         Lack of Transparency and Information Gaps

·         Issues with Resolution Professionals (RPs)

·         Deviation from Original Objectives

·         Enhance Timeliness

·         Optimize Recovery Mechanisms

·         Promote Transparency:

·         Strengthen Oversight on Corporate Entities:

·         Enforce Professional Ethics

• Resolution plans are taking longer than the stipulated 330 days, with the Reliance Communications Infrastructure Ltd. (RCIL) case taking four years.
• Despite claims totaling ₹49,668 crore, the NCLT approved a settlement of only ₹455.92 crore, representing just 0.92% of the debt.

Low Recovery Rates and Haircuts:

• Examples such as Essar Power MP Ltd. and Videocon show significantly low amounts recovered, with haircuts ranging from 5% to 12.37%.
• Haircuts are becoming common in large corporate insolvencies, leading to substantial losses for Financial Creditors (FCs).

Favorable Treatment for Corporate Defaulters:

• Instances like Reliance Infratel and Siva Industries suggest that corporate entities with significant assets are taken over at minimal costs, potentially leading to a perception of favoritism.

Inadequate Realization for Creditors:

• The Financial Stability Report (FSR) indicates that creditors realize only 10-15% in NCLT-settled cases involving large corporates.
• The report highlights a significant gap between admitted claims and the realizable value for creditors.

Lack of Transparency and Information Gaps:

• The FSR does not provide details on the disposal and recovery of 25,107 applications for Corporate Insolvency Resolution Processes (CIRPs) worth ₹8.81 lakh crore, raising questions about transparency.
• Information gaps in the RBI report contribute to the overall lack of clarity on the disposal and recovery of cases.

Issues with Resolution Professionals (RPs):

• The Parliamentary Standing Committee on Finance identified issues with Resolution Professionals (RPs), with 60% of them found indulging in malpractices.
• Urgent need for a professional code of conduct for the Committee of Creditors (COCs) remains unaddressed.

Deviation from Original Objectives:

• The Parliamentary Standing Committee on Finance noted that low recovery rates, high haircuts, and delays in the resolution process deviate from the original objectives intended by Parliament.
• Lack of implementation of recommended measures, such as fixing a ceiling on haircuts, contributes to the deviation.

Recommendations

• Enhance Timeliness: Ensure strict adherence to the 330-day timeline for resolution plans to expedite insolvency proceedings.
• Optimize Recovery Mechanisms: Implement measures to boost recovery rates, limiting financial losses for creditors and strengthening the IBC.
• Promote Transparency: Establish robust reporting mechanisms for case disposition, reducing information gaps and enhancing transparency in insolvency proceedings.
• Strengthen Oversight on Corporate Entities: Implement rigorous scrutiny to prevent favorable treatment, ensuring fair and unbiased resolution processes for all entities.
• Enforce Professional Ethics: Introduce and enforce a professional code of conduct for Resolution Professionals and Committee of Creditors to curb malpractices.