Insolvency and Bankruptcy Code

Apr, 03, 2019

RBI circular to banks on loan defaulters quashed

News

  • The Hon’ble Supreme Court has struck down a Feb-2018 RBI circular giving lender banks six months to resolve their stressed assets or move under the Insolvency Code against private entities who have defaulted in loans worth over Rs. 2000 crore.

About the RBI circular

  • Through a notification issued on Feb 12, 2018 the RBI laid down a revised framework for the resolution of stressed assets, which replaced all its earlier instructions on the subject.
  • Banks were required to immediately start working on a resolution plan for accounts over Rs 2,000 crore, which was to be finalised within 180 days.
  • In case of non-implementation, lenders were required to file an insolvency application.
  • RBI termed it necessary to substitute the existing guidelines with a harmonized and simplified generic framework for resolution of stressed assets.

What did the revised framework replace?

  • The circular went into effect on the same day that it was issued, and all existing schemes for stressed asset resolution were withdrawn with immediate effect.
  • The circular was ostensibly intended to stop the “evergreening” of bad loans the practice of banks providing fresh loans to enable timely repayment by borrowers on existing loans.
  • The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.

Issues with the circular

  • The companies argued that the circular was arbitrary and discriminatory, and therefore, violative of Article 14 of the Constitution.
  • Several companies from the power and shipping sectors had challenged the circular, arguing that the time given by the RBI was not enough to tackle bad debt.
  • The government had earlier asked the RBI to make sector-specific relaxations in the timeline for the implementation of the circular.
  • Power producers, for instance, had argued that the RBI’s ‘one-size-fits-all’ approach was impractical since the sector had to confront external factors that were beyond its control.
  • These factors included the unavailability of coal and gas, and problems arising out of the failure of state governments to honour power purchase agreements.

Impact of SC’s relaxation

  • The order provides immediate relief to companies that have defaulted in repayments, especially those in the power, shipping and sugar sectors.
  • However, many financial sector experts argued that the verdict could delay the process of stressed assets resolution, which had of late picked up pace.
  • Since banks will have the choice of devising resolution plans or going to the National Company Law Tribunal under the IBC, the urgency that the RBI’s rules had introduced in the system could be impacted.
Mar, 18, 2019

[op-ed snap] Deals to rules

Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Positive handling of bad loans through IBC and other initiative.


NEWS

CONTEXT

India’s bad loan policy is finally moving in the right direction.

Reasons for high default

  • Not creating the fear of immediate, automatic and borrower-blind consequences for default is one reason why India’s credit to GDP ratio is a low 50 per cent (Arunachal is 1 per cent, Bihar is 17 per cent, 100 per cent is the average for rich countries).

Reforms in the right direction

  • But over the last three years, the new Insolvency and Bankruptcy Code (IBC) and the RBI’s Revised Framework for Resolution of Stressed Assets (RFRSA, issued on February 12 last year) have begun to show impressive results in recognition (we know the truth), deterrence (defaults are reducing), resolution (defaults are being cured) and speed (defaults are being cured faster).
  • This is great news for financial inclusion of the small, honest, and non-politically connected.

No difference with willful defaulter Tag

  • The “willful defaulter” tag is a distinction without a difference; banks face pain irrespective of whether a default is caused by Fraud , Competition , or Unsustainable Ambition.
  • Current court petitions by defaulting sugar, shipping and power companies against the IBC and RFRSA should be dismissed because they want pre-IBC bank behaviour (discretionary bad loan recognition via restructuring or evergreening) that created our pre-IBC regime (Eagle’s Hotel California, where you check in but never check out).

The effectiveness of new reforms

  • India’s new policy regime for defaults — IBC plus RFRSA — ensures a time-bound exploration of all business, capital and ownership restructuring options before liquidation.
  • It is working; bad loans went from 2.4 per cent in 2007 to 11.6 per cent in 2018 but may now be down to 10.2 per cent.
  • And the direct impact of RFRSA lies in annualised reduction in bad loans for recent quarters being the highest in recent years with a huge acceleration in two-way mobility between standard and non-standard loan classifications.
  • Of the 82 accounts resolved by the IBC, the average realisation by financial creditors was 48 per cent and average time taken for resolution was 310 days (versus World Bank estimates of 27 per cent and 1,580 days).
  • RFRSA fixed birth defects of past RBI interventions like SDR, S4A, JLF, CAP, etc by requiring weekly reporting by banks on all accounts in default anytime during the week with exposure greater than Rs 50 million, requiring all lenders to initiate steps to cure a default with any lender, requiring an independent credit opinion for resolution plans, and setting a 180-day implementation deadline for resolution plans in loans greater than Rs 2,000 crore.

Challenges

  • Litigation has choked the pipeline with resolution for only three of the RBI’s first IBC list of 12, only 63 of the total 1,484 cases admitted under the IBC have the highly desirable outcome of being withdrawn under Section 12A (withdrawal from insolvency prior to expression of interest stage with consent of 90 per cent of lenders).
  • recovery rates are still lower than global averages, and 31 per cent of the 898 ongoing insolvency cases at the end of 2018 have breached the 270-day deadline.

Learning from the mistakes of  China

  • China can teach us a lot about labour markets but not about banking.
  • Their share of bank lending to the private sector has shrunk by 80 per cent since 2013, total bad loans may exceed $3 trillion, and total debt now exceeds 300 per cent of GDP (most loans went to construction because China produced three times as much cement between 2012 and 2016 as the US did in the entire 20th century).
  • While China’s treatment of defaulters is tempting — they recently expanded restrictions on travel, buying homes, holding high-level jobs, kids school eligibility, etc for defaulters — these practices are inconsistent with a democracy.

Way Forward

  • Over the last three years, India’s bad loan policy moving from deals to rules means the long arc of economic history is finally bending towards justice.
  • This remarkable reform will not only recover Rs 3 lakh crore plus for banks but has hugely positive consequences for India’s productivity, wages and prosperity.

 

Mar, 11, 2019

[op-ed snap]Resolution, at last: on Essar Steel case

 

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level: The issues discussed in the newscard regarding the IBC’s various aspects through Essar ruling.


NEWS

CONTEXT

Essar Steel case has clarified many aspects of the Insolvency and Bankruptcy Code process.

Significance of Case

  • The National Company Law Tribunal’s approval of ArcelorMittal’s bid for the insolvent Essar Steel Ltd. is significant for several reasons.
  • First, the ₹42,000-crore bid will be the largest single recovery of debt under the fledgling Insolvency and Bankruptcy Code (IBC) enacted in 2016.
  •  Second, the case, which took 583 days to resolve, compared to the 270 days provided under the Code, has tested several aspects of the law and set important precedents for the future.
  •  Among the aspects that have been clarified are the eligibility of those who have defaulted in repaying their borrowings elsewhere to bid, the time-limits for bidding and the place of unsecured, operational creditors under the resolution mechanism.
  •  In the event, the successful culmination of the Essar Steel case will be a big leg-up for the insolvency resolution process that is less than three years old.

Challenges 

  • The Code provides for an appeal to the National Company Law Appellate Tribunal and then to the Supreme Court, and it is unlikely that the promoters, who bid a much higher ₹54,389 crore, will let go without a fight.
  • The banks, though, will be hoping that the process ends in the next couple of weeks as they would want to account for the receipts from the resolution process within this financial year.
  • After all, only four cases (excluding Essar Steel) out of the initial list of 12 big defaulters referred by the Reserve Bank of India for resolution back in June 2017 have been successfully resolved till now.
  • Insolvency and Bankruptcy Board of India data also point to a pile-up of cases in the various benches of the NCLT.
  • As many as 275 companies, representing 30% of the total of 898 undergoing resolution, have exceeded the 270-day limit set for resolution under the Code.

Way Forward

  • The fact is that there is a need for more benches of the NCLT to clear the pile-up. The government would do well to look into this issue.
Feb, 05, 2019

Government submits resolution plan for IL&FS

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: IL&FS crisis

Mains level: Too big to fail institutions and their risk of failing


News

  • The government has submitted the debt resolution plan for crisis-hit IL&FS to the NCLAT and also suggested the name of retired Supreme Court judge Justice D K Jain to supervise the entire process.

What is IL&FS Crisis?

  1. The IL&FS Ltd is an infrastructure finance company registered with the Reserve Bank of India as a ‘Systemically Important Non-Deposit Accepting Core Investment Company’, with over Rs.1,15,000 crore of assets and Rs. 91,000 crore of debt.
  2. IL&FS defaulted on a few payments and failed to service its commercial papers (CP) on the due date—which means the company has run out of cash or it is facing a liquidity crunch.
  3. The company piled up too much debt to be paid back in the short-term while revenues from its assets is skewed towards the longer term.

The Resolution Plan

  1. The entire resolution process would be based on the principles enunciated in the Insolvency and Bankruptcy Code.
  2. Under the plan, the government has categorised IL&FS group companies into green, amber and red based on their respective financial positions.
  3. The corporate affairs ministry has fixed September 30, 2018 as the cut-off date for entertaining the claims submitted by the lenders.
  4. During the conduct of the resolution process, payments will be permitted only to maintain and preserve the going concern status of the companies of the IL&FS group.

Declaring a bidder

  1. Upon receipt of the recommendations, a successful bidder would be declared, who will deposit the earnest money.
  2. Upon declaration of the bidder, documentation of the sale will be completed and the forwarded to National Company Law Tribunal for the final approval.
  3. According to the affidavit filed before the NCLAT, the classification of the IL&FS group companies is “based on a 12-month cash flow based solvency test”.

3 Categories

  1. Companies falling in the green categories are the entities, which will continue to meet their payment obligation.
  2. While companies falling in the amber category are those who are not able to meet their obligations but can meet only operational payment obligations to senior secured financial creditors.
  3. Amber category entities “are permitted to make only payments necessary to maintain and preserve the going concern”.
  4. Companies falling in the red category are the entities which can not meet their payment obligations towards even senior secured financial creditors.
  5. These companies would be permitted to make payment necessary to maintain and preserve the going concern status.

Asset Monetization Plan

  1. The distribution of the sale proceeds would be in accordance with the waterfall mechanism specified under section 53 of the IBC.
  2. Under Section 53 of IBC, senior secured creditors loans are cleared first and any surplus that remains thereafter is given to unsecured or subordinated creditors and thereafter to the equity owners.

For detailed reading on IL&FS crisis , navigate to the page:

[Burning Issue] IL&FS Crisis

Oct, 23, 2018

Panel for adopting UN model on cross-border insolvency

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: UNCITRAL Model Law

Mains level: Policy measures to curb cross border insolvency.


News

Context

  • The Insolvency Law Committee (ILC), tasked with suggesting amendments to the Insolvency and Bankruptcy Code of India (IBC), has recommended for adopting the UN model to handle cross-border insolvency cases.

Recommendations of the ILC

  1. The ILC has recommended the adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law of Cross Border Insolvency, 1997.
  2. The Model Law has been adopted in 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.
  3. It provides for a comprehensive framework to deal with cross-border insolvency issues.
  4. The ILC has also recommended a few changes to ensure that there is no inconsistency between the domestic insolvency framework and the proposed cross border insolvency framework.

Why adopt UNCITRAL Model Law

  1. The proposed IBC will enable us to deal with Indian companies having foreign assets and vice versa.
  2. However it still does not provide for a framework for dealing with enterprise groups, which is still work in progress with UNCITRAL and other international bodies.
  3. Many Indian companies have a global footprint and many foreign companies have a presence in multiple countries, including India.
  4. The other advantages include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic Insolvency Law and a robust mechanism for international cooperation.

Back2Basics

UNCITRAL Model Law of Cross Border Insolvency

  1. It is a model law issued by the secretariat of UNCITRAL in 1997 to assist states for the regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more than one state.
  2. It defines a cross-border insolvency as one where the insolvent debtor has assets in more than one state, or where some of the creditors of the debtor are not from the state where the insolvency proceeding is taking place.
  3. The model law deals with four major principles of cross-border insolvency namely:
  • direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor;
  • recognition of foreign proceedings & provision of remedies;
  • cooperation between domestic and foreign courts & domestic and foreign insolvency practioners;
  • coordination between two or more concurrent insolvency proceedings in different countries.
  1. The main proceeding is determined by the concept of centre of main interest (“COMI”).

UNCITRAL

Please navigate to:

[pib] United Nations Commission on International Trade Law (UNCITRAL) completes 50 years

Aug, 13, 2018

More banks report tightening of credit standards, shows survey

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: The newscard discusses measures adopted by banks to reduce NPAs.


News

Cautioned over NPAs

  1. A survey conducted by FICCI and Indian Banks’ Association (IBA) showed more respondents claiming they had tightened credit standards during January-June 2018, the period in which survey was conducted.
  2. 67% respondents among participating banks have reported tightening of standards, steeply increasing from 28% in the last round of the survey.
  3. A total of 22 public sector, private sector and foreign banks participated in the survey, which is conducted twice a year. These banks together represent 64% of the banking industry, as classified by asset size.
  4. This round has been conducted at a time when NPAs have shot past the Rs. 10-lakh crore marks and continue to rise.

IBC effect

  1. The survey noted that with stressed assets rising, banks have generally adopted a cautious approach in lending, to prevent fresh slippages.
  2. As was the case in the previous round of the survey, 59% of the respondent banks reported a rise in NPAs in the current round of the survey.
  3. Infrastructure, metals and engineering goods were the key sectors reported with the highest NPAs. More than two-thirds of the respondents have cited these as sectors with high NPAs.
  4. At the same time, most participating banks agreed that the Insolvency and Bankruptcy Code (IBC) had made the recovery process faster and improved the recovery position of banks.
  5. To improve the resolution rate, bankers suggested strengthening of the judiciary, enhancing capacity, empowerment of local level government officials, among other suggestions.
  6. They also said that extension of the moratorium beyond 270 days for any reason should not be permitted.
Aug, 08, 2018

Govt. panel suggests amending Passport Act to prevent borrowers from fleeing country

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Preventing bank fraudsters and other offenders fleeing the country


News

Amending Passport Act

  1. A government panel has recommended amending the Passport Act to prevent borrowers from fleeing the country.
  2. If the recommendations are accepted, it will be a step towards ensuring that large borrowers are held accountable for non-payment of loans to banks and cannot flee the country without paying their dues.
  3. The recommendations include that over a reasonably prescribed limit, wherever there is a financial risk in a particular (loan) account, the borrower will be asked to participate in the resolution of the account, and stop them from fleeing the country.
  4. The government will prescribe a threshold for the loan default, beyond which the lenders will be empowered to alert enforcement agencies as per the provisions in law.

Other recent measures

  1. The government has already enacted the Fugitive Economic Offenders Law to ensure that the fugitives return to the country to face prosecution.
  2. The law empowers confiscation of all assets both within and outside the country for all offences where the monetary value of the offence exceeds ₹100 crore.

What data says about offenders?

  1. According to data collated by the external affairs ministry, 28 Indians involved in financial irregularities had fled the country in the period between 2015 and 30 June 2018.
  2. The list was compiled by the Central Bureau of Investigation and Enforcement Directorate (ED), and includes names like Mallya, Nirav Modi and his brother Neeshal Modi, Choksi and Lalit Modi.

About the Panel

  1. The government panel is headed by Rajiv Kumar, secretary, Department of Financial Services in the ministry of finance.
  2. Other members of the panel include representatives from Enforcement Directorate, Central Bureau of Investigation, Reserve Bank of India, Home ministry and ministry of external affairs.
  3. The panel was set up after increasing instances of bank frauds were unearthed, with enforcement agencies unable to prevent the defaulters and fraudsters from fleeing the country.
Jul, 19, 2018

[op-ed snap] Explaining the Fugitive Economic Offenders Ordinance

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: Read the attached story

Mains level: Laws to prevent economic frauds


News

Who is a fugitive economic offender?

  1. Under the Fugitive Economic Offenders Ordinance, promulgated by the President in April, a fugitive economic offender is any individual against whom a warrant for arrest in relation to a scheduled offence has been issued by any court in India and who has either left India to avoid criminal prosecution, or who, being abroad, refuses to return to India to face criminal prosecution.
  2. The list of offences that can qualify an individual to be designated an economic offender, enumerated in the schedule to the Ordinance, includes offences under several Acts such as:
  • Negotiable Instruments Act, 1881;
  • Reserve Bank of India Act, 1934;
  • Central Excise Act, 1944;
  • Customs Act, 1962;
  • Prohibition of Benami Property Transactions Act, 1988;
  • Prevention of Money Laundering Act, 2002; and
  • Indian Penal Code.

What happens if a person is designated a fugitive economic offender?

  1. If the special court is satisfied that an individual is a fugitive economic offender, it can direct the Central government to confiscate the proceeds of the crime in India or abroad, whether or not such property is owned by the fugitive economic offender, and any other property or benami property in India or abroad that is owned by the fugitive economic offender.
  2. While the confiscation of property within India should not be a problem for the Centre, confiscating properties abroad will require the cooperation of the respective country.
  3. The fugitive economic offender will also be disqualified from accessing the Indian judicial system for any civil cases.

On whom does the burden of proof lie?

In keeping with the principle of ‘innocent until proven guilty’, the burden of proof for establishing that an individual is a fugitive economic offender or that certain property is part of the proceeds of a crime is on the Director appointed to file an application seeking fugitive economic offender status.

Jun, 22, 2018

Cross-border insolvency: Rules to help lenders access foreign assets

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: UNCITRAL

Mains level: The newscard highlights the priority of government to counter  cross-border insolvency


News

Amendments for Cross-Border Insolvency in IBC

  1. The government put out a draft amendment on cross-border insolvency to further strengthen the Insolvency and Bankruptcy Code (IBC), seeking to help lenders access overseas assets of a stressed company.
  2. The draft aims to enable India to seek cooperation from foreign countries to bring defaulters’ assets there under consideration for insolvency proceedings.
  3. In this respect, the draft favours adoption of an existing UN model law (United Nations Commission on International Trade Law, or UNCITRAL) on cross-border insolvency that has already been ratified by 44 countries.

How will it work?

  1. A cross-border insolvency law recognises that one country has to proceed with the main insolvency case while others with supplementary cases, depending on the location of defaulter’s assets.
  2. Similarly, if a foreign country has already initiated insolvency proceedings against a particular defaulter to recover stressed assets some of which are located here, India, too, will have to cooperate with that nation.

What are its benefits?

  1. Once enacted, this will offer a level playing field to Indian companies with investment and creditors overseas and multinational companies with interest in India.
  2. It will offer greater certainty and predictability to insolvencies involving multiple jurisdictions.

Back2Basics

United Nations Commission on International Trade Law

  1. UNCITRAL was established in 1966 with the recognition that international trade cooperation among States is an important factor.
  2. When world trade began to expand dramatically in the 1960s, national governments began to realize the need for a global set of standards and rules to harmonize national and regional regulations, which until then governed international trade.
  3. UNCITRAL Model Law on Cross-Border Insolvency was a model law issued by the Secretariat of UNCITRAL in 1997 to assist states in relation to the regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more than one state.
  4. The Model Law is designed to provide a model framework to encourage cooperation and coordination between jurisdictions.
May, 22, 2018

[op-ed snap] Miles to go: The bankruptcy code

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspective, the following things are important:

Prelims level: Read the attached stories

Mains level: The issues discussed in the newscard regarding the IBC.


News

The new bankruptcy code yields its first success

  1. Tata Steel acquired 73% stake in the bankrupt firm Bhushan Steel for about Rs. 35,000 crore last week, making it the first major resolution of a bankruptcy case under the new Insolvency and Bankruptcy Code (IBC)
  2. Bhushan Steel was one among the 12 major accounts referred to the National Company Law Tribunal at the behest of the Reserve Bank of India last year to ease the burden of bad loans on banks

Expectations of the Finance Ministry from Banks

  1. The Finance Ministry now expects banks to recover more than Rs. 1 lakh crore from the resolution of the other cases referred by the RBI to the NCLT
    Possible benefits
  2. If the banks do indeed recover funds of this scale, it would considerably reduce the burden on taxpayers
  3. Even more important, speedy resolution would free valuable assets to be used for wealth-creation

Many challenges are still there

  1. The resolution of one high-profile case, however, should not deflect attention from the many challenges still plaguing the bankruptcy resolution process
  2. The IBC, as the government itself has admitted, remains a work in progress

Some issues with the present IBC

  1. The issues such as the proposed eligibility criteria for bidders have left it bogged down and suppressed its capacity to help out creditors efficiently
  2. Also, the strict time limit for the resolution process as mandated by the IBC is an area that has drawn much attention,
  3. and it merits further review in order to balance the twin objectives of speedy resolution and maximising recovery for the lenders

The way forward

  1. Going forward, amendments to the bankruptcy code should primarily be driven by the goal of maximising the sale price of stressed assets
  2. This requires a robust market for stressed assets that is free from all kinds of entry barriers
May, 18, 2018

180 days too long for resolving insolvency, says IBBI member

Note4students

Mains Paper 2: Governance | Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

From UPSC perspectives, the following things are important

Prelims Level: IBBI

Mains Level: Important for business sector.


News

Statement by a member of the IBBI(Insolvency and Bankruptcy Board of India)

  1. A member of the Insolvency and Bankruptcy Board of India (IBBI) said the current time limit to resolve insolvency cases was more than adequate
    A significant statement
  2. This assumes significance in light of demands for more time to resolve cases filed for bankruptcy
  3. In the present era, we have professionals with technology and offices that are increasing in efficiency
  4. With the availability of these, why should any time be lost?
  5. The sooner we remove such cases, the sooner will we clear the way for the business sector to move ahead

Current status

  1. Currently, after a case is admitted in the National Company Law Tribunal, it has to be resolved within 180 days, failing which the company goes into liquidation
  2. In exceptional cases, the NCLT may allow another 90 days for resolution

Default is not always related to criminal conduct

  1. When a loan is not repaid, the default is automatically construed as criminal conduct under the Code
  2. But there could be situations where the default is purely a result of market forces
  3. Therefore, it can’t be called criminal conduct in all cases
Apr, 02, 2018

Insolvency and Bankruptcy Code set for major overhaul

Note4students

Mains Paper 2: Governance | Government policies & interventions for development in various sectors & issues arising out of their design & implementation

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Code, Alternative investment funds

Mains level: Insolvency procedure in India and various issues related to it


News

IBC amendments

  1. The ministry of corporate affairs is finalizing a series of IBC amendments based on a panel’s recommendations
  2. This is to remove difficulties in turning around businesses and to strike a balance between the interests of lenders, customers of failed businesses and their promoters

Proposed amendments

  1. They make a strong case for treating homebuyers as financial creditors, enabling them to take builders defaulting on their obligations to a bankruptcy court and decide their future along with lenders
  2. Amendment will make it easier for the panel of creditors to make key decisions for resolution or liquidation with 66% of the vote, less than the 75% required now
  3. It will make sure that the provisions enacted in January to disqualify wilful defaulters and those ‘acting jointly’ with them from bidding for the bankrupt firm do not unfairly bar entities like asset reconstruction companies (ARCs), banks and alternative investment funds
  4. The code will also define financial entities which are not covered by the disqualification in a move aimed at widening the pool of potential bidders
  5. The proposed amendments will also make sure that companies filing for bankruptcy have to notify their banks and suppliers of their decision

Applicability of provisions

  1. The IBC amendments will apply prospectively once enacted
  2. It will also clarify that lenders’ action against any guarantor to a bankrupt firm do not enjoy the same protection from recovery proceedings that the insolvent company enjoys while a rescue plan is prepared
Mar, 23, 2018

Govt to set up more NCLT benches to handle wave of bankruptcy cases

Note4students

Mains Paper 2: Governance | Important aspects of governance, transparency and accountability, e-governance- applications, models, successes, limitations, and potential

From UPSC perspective, the following things are important:

Prelims level: IBC code(read the attached story)

Mains level: The NCLT courts are important tools against ongoing NPA crisis in the country.


News

Increase in the number of the National Company Law Tribunal(NCLT) benches

  1. The government is set to increase the number of bankruptcy courts to ease the load on existing benches overburdened by creditors suing defaulting businesses and expedite resolution of insolvency cases
  2. The government will also hire more judicial and technical officers to take into account the requirement of the new NCLT benches at Cuttack, Jaipur and Kochi
  3. NCLT has 11 benches at present, including a principal bench in the capital

Need of more NCLT courts

  1. According to experts, bankruptcy courts are over-burdened as they also address other company law matters
  2. relating to mismanagement and oppression, mergers and acquisitions and cases of de-registration of companies on account of defaulting on statutory annual return filing requirements
  3. Cases relating to mergers and acquisition were earlier handled by high courts

Possible changes to the insolvency and bankruptcy code 

  1. Simultaneously, the legislative framework is being streamlined
  2. Possible changes to the insolvency and bankruptcy code include (1) introduction of a simpler code for micro, small and medium enterprises, (2) granting creditor status to home buyers who have given advances to real estate firms and modifying procedures about clearing turnaround plans
  3. An expert panel is expected to give its recommendations on modifications to the bankruptcy code to the government shortly
  4. The need to amend the code arose from the gaps that emerged as the resolution process gathered momentum
Dec, 29, 2017

Govt moves amendments to plug loopholes in insolvency law

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy code, asset reconstruction companies, alternative investment funds, sustainable structuring of stressed assets

Mains level: Rising NPA problem and ways to tackle it


News

Insolvency and Bankruptcy Code (Amendment) Bill 2017

  1. It seeks to streamline the law and plug loopholes
  2. Bill allows defaulting promoters to be part of the debt resolution process, provided they repay dues in a month
  3. This will aid promoters who had submitted resolution plans before the enactment of an ordinance that barred them from taking part in the resolution process of the companies

Other provisions

  1. Bill has paved the way for asset reconstruction companies, alternative investment funds (AIFs) such as private equity funds and banks to participate in the bidding process
  2. Many of these entities acquire distressed assets and the classification of these assets as non-performing assets (NPAs) would have disqualified them from the bidding process
  3. Similarly, banks opting to convert their debt into equity under the Reserve Bank of India’s scheme for sustainable structuring of stressed assets would have inadvertently become promoters of these insolvent companies and thereby been barred from the resolution process
  4. The bill has also sought to bring any individual who was in control of the NPA under the ambit of the insolvency code
  5. It lays out that the individual insolvency law will be implemented in phases
  6. The amendment bill has addressed concerns about some of the stringent provisions in the ordinance that was brought in last month

Insolvency and Bankruptcy code

  1. The IBC was enacted in 2016 to find a time-bound resolution for ailing and sick firms, either through closure or revival, while protecting the interests of creditors
  2. A successful completion of the resolution process was expected to aid in reducing rising bad loans in the banking system
Dec, 28, 2017

[pib] IBBI grants recognition to two registered valuers organistaions

Note4Students

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Board of India

Mains level: Functions of IBBI


News: 

  • In pursuance to the Companies (Registered Valuers and Valuation) Rules, 2017, the Insolvency and Bankruptcy Board of India (IBBI) has recognised two registered valuers organisations.
  • The Institution of Estate Managers and Appraisers will handle one asset class of “land and building” while the IOV Registered Valuers Foundation will handle three asset classes of “land and building”, “plant and machinery” and “securities or financial assets”.
  • These registered valuers organisations will conduct educational courses in valuation, grant membership and certificate of practice to individuals, conduct training for its members and lay down and enforce the Code of Conduct for the registered valuers, who are its members.
Dec, 16, 2017

[op-ed snap] Changed priorities

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Non-performing assets, bankruptcy, Insolvency and Bankruptcy Code (IBC) 2016, CRILC, Insolvency and Bankruptcy Board of India

Mains level: Measures related to tackling NPAs


Context

  1. The 2017 Forbes India List says that the combined net worth of India’s 100 wealthiest stood at a whopping $479 billion
  2. Even then, top corporate borrower groups in India are unable to repay loans and make timely interest payments

Tackling NPAs

  1. The government has taken the high moral ground to deal with the menace of non-performing assets (NPAs)
  2. NPAs have brought many public sector banks on the verge of bankruptcy
  3. Government brought an ordinance on November 23 amending the Insolvency and Bankruptcy Code (IBC) 2016
  4. It disqualified errant promoter from participating in the bidding process

Intent of ordinance

  1. It signals the government’s intent to shift attention away from recovery of bad loans to selling the assets of defaulting corporates
  2. The May 2017 ordinance directed banks to accept deep haircuts on their non-performing loans

Corporates-bank nexus

  1. These corporates have not been downgraded on their creditworthiness parameter although the Reserve Bank of India (RBI) has been monitoring all large loans through the Central Repository of Information on Large Credits (CRILC) since 2014

Loopholes in IBC

  1. The Insolvency and Bankruptcy Board of India (IBBI) is the regulator set up on October 1, 2016, under the Insolvency and Bankruptcy Code
  2. The IBBI is assisted by the disciplinary, advisory and technical committees
  3. The resolution professionals entrusted with the responsibility of sorting out the insolvent companies or individuals can be registered with any one of the three insolvency professional agencies
  4. The advisory committees on corporate insolvency and liquidation are chaired by several top corporates
  5. The appointment of corporates as heads of important corporate insolvency advisory committees under IBBI does not inspire confidence in the credibility of the resolution process

Way forward

  1. The recent ordinance may end up being used selectively to defeat the very objective of penalizing the errant promoter
  2. The banks will only lose if resolution is sidetracked by the ensuing power struggle among corporate India to purchase distressed assets at rock-bottom prices
Nov, 27, 2017

[op-ed snap] Messy fix: the amended insolvency code

Image source

Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Code

Mains level: Measures being taken to resolve NPA issue


Context

Ordinance for amending the Insolvency and Bankruptcy Code 

  1. The Central government has passed an ordinance that significantly amends the Insolvency and Bankruptcy Code
  2. The aim of the changes is stated ‘to strengthen further the insolvency resolution process’

How will this be undertaken?

  1. There will be prohibition of certain persons from submitting a resolution plan, who, on account of their antecedents, may adversely impact the credibility of the processes
  2. The categories of persons who are deemed ineligible to participate in resolving a corporate entity’s debt once it has been put under the process of insolvency resolution by creditors have also been mentioned

How this changes will affect corporates?

  1. The category of people barred is too broad and risks the very objectives of the original code
  2. Not all bad loans are a result of mala fide intent on the borrower’s part
  3. Barring the promoters of such firms whose companies have ended up struggling to service debt as a result of unpredictable external factors from a chance to restructure and turnaround the business, merely because the loans have turned sour, is unfair to both the entrepreneur and the enterprise itself
  4. The amendment risks becoming an instrument of blunt force that hurts more than it helps

Objective of IBC

  1. IBC is not intended to serve as a mere instrument of liquidation
  2. It is to provide an enabling legal framework for the “reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons
  3. And to promote entrepreneurship
Nov, 23, 2017

Insolvency and Bankruptcy code being changed, wilful defaulters can’t bid for stressed assets

Note4Students:

Mains Paper3 | Indian economy – planning and development

The following things are important from UPSC perspective:

Prelims: IBC- Insolvency Bankruptcy Code

Mains level: This news card talks about the recent amendments introduced in the IBC by the government.


News

Context

  1. The Union Cabinet approved the promulgation of an ordinance to amend the Insolvency and Bankruptcy Code (IBC) to streamline the stressed-assets resolution process and effectively bar willful defaulters from bidding for companies being put up for sale under the IBC.
  2. The ordinance was being sent to the President and his approval was expected very soon.
  3. The amendments have been introduced after concerns were raised on existing promoters wresting back control of companies under resolution at cheap valuation.

The Amendments in the IBC

  1. The amendments to the IBC explicitly prohibit persons declared as willful defaulters or those having a history of siphoning funds from a company, or convicted of fraud, from submitting a resolution plan for companies that are going through the corporate insolvency resolution process.
  2. The changes also empower the Insolvency and Bankruptcy Board of India (IBBI) to outline further eligibility requirements for applicants bidding for companies under resolution.
  3. There is no plan to prevent existing promoters from submitting a resolution plan for their own companies.
  4. The ordinance also proposes to disallow sale of property to a person who is disqualified to be a resolution applicant.
  5. The amendments explicitly provide that the Committee of Creditors consider viability of the resolution plan at the time of approval.

Two new Sections inserted in IBC

  1. Apart from the amendments, the government has also inserted two new Sections to the IBC.
  2. While Section 23 5A has been added to provide for punishment for contravention where no specific penalty or punishment has been provided.
  3. Section 29 A has been inserted to prevent an “un-discharged insolvent” from participating in the resolution plans.
  4. Section 29A also provides for disallowing an account declared as non performing asset (NPA) for one year or more for being a resolution applicant.

Concerns

  1. The proposed changes to the IBC, do not address the concerns of homebuyers stuck with undelivered flats by companies that are now undergoing resolution.
  2. The IBC currently overlooks the interests of the buyers who have booked the property but are yet to get it registered in their names.
  3. In such a case, the IBC does not provide any remedy to the homebuyers even though they have paid most of the apartment cost.

 

Nov, 21, 2017

‘Wilful defaulters must not buy IBC assets’

Image Source

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: Read B2B

Mains level: Shows the seriousness of government to tackle the issue of the NPA


News

Direction from the Finance Ministry

  1. The Finance Ministry has asked banks to be vigilant to ensure that wilful defaulters are prevented from buying stressed assets again
  2. Why: To ensure the success of the bankruptcy process under the Insolvency and Bankruptcy Code (IBC)

Why this step?

  1. It has been brought to the notice of the Finance Ministry that some wilful defaulters were making a bid to buy the assets of those cases which have been referred under IBC
  2. The resolution is crucial to the entire banking sector and therefore banks have been advised to be vigilant so that wilful defaulters do not get benefits of the process
  3. Banks have to be very conscious of the fact that such defaulters do not get into the system again

Back2basics

The Insolvency and Bankruptcy Code (IBC)

To know more about the code, Click here

Nov, 08, 2017

Insolvency resolution norms made stringent

Note4students

Mains Paper 3: Indian economy – planning and development.

The following things are important from UPSC perspective:

Prelims: IBBI.

Mains level: This newscard talks about the amendments made by the IBBI in corporate resolution process and  its impact.


News

Context

The amendment

  1. The Insolvency and Bankruptcy Board of India (IBBI) has amended the corporate insolvency resolution process regulations to ensure that applicants, including promoters, are put to a stringent test with respect to their credit worthiness and credibility.
  2. The amendment also imposes greater responsibility on the resolution professional and the Committee of Creditors in discharging their duties.
  3. The amendments will ensure that as part of due diligence prior to approval of a resolution plan, the antecedents, credit worthiness and credibility of a resolution applicant, including promoters, are taken into account by the Committee of Creditors.
  4. To ensure that the corporate insolvency resolution process results in a credible and viable resolution plan, the IBBI has carried out amendments to the IBBI (Insolvency Resolution Process for Corporate Persons) Resolution Process, 2016 (CIRP Regulations).


Back2basics

IBBI

  1. It is a modern framework to deal with bankruptcy and insolvency of variety of economic players, including individuals, but excluding financial firms.
  2. Insolvency and Bankruptcy Board of India has been setup to act as a regulator for these utilities and professionals.
  3. It has restored some power to creditors, both financial and operational.
  4. It has fast-tracked the mechanism of insolvency resolution process.
  5. The corporate insolvency would have to be resolved within a period 180 days, extendable by 90 days.
  6. It also provides for fast-track resolution of corporate insolvency within 90 days.
  7. Debt Recovery Tribunals have been set up as adjudicating authority over both individual & unlimited liability partnership firms.
  8. National Company Law Tribunalis adjudicating authority with jurisdiction over companies with limited liability.
  9. It has a clause to provide for insolvency professionalswho will specialize in helping sick companies and in their revival.
  10. It also provides for information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system.
  11. It has also established  Insolvency and Bankruptcy Fund of India, deposits of the fund will include grants made by the central government, the amount deposited by the persons, interest earned on investments made from the fund etc. any person, who has contributed to the fund, may apply for withdrawal, in a case of proceedings against him.
Aug, 18, 2017

Insolvency proceedings: New form allows homebuyers to seek claims from firms

Image result for insolvency and Bankruptcy Code (IBC).

Image source

Note4students

Mains Paper 2: Polity | Separation of powers between various organs dispute redressal mechanisms and institutions.

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Insolvency and Bankruptcy Code (IBC) features


News

  1. The government has introduced a new form under the insolvency law to enable a person who has to receive a payment from an insolvent company to seek the claim.
  2. This will enable persons such as homebuyers to make claims for undelivered flats on a company undergoing resolution under the Insolvency and Bankruptcy Code (IBC).

What are the new changes?

  • Till now, only financial and operational creditors were permitted to seek claims under the IBC.
  • But Insolvency and Bankruptcy Board of India (IBBI) has amended the regulations whereby claims can be made by creditors other than financial and operational creditors.
  • Such entities should submit proof of their claims to the resolution professional, as per a notification issued by the IBBI.
  • There could be claims from a creditor who is not a financial creditor or an operational creditor and it needs a specific form for submitting its claim.
  • The revised regulations come at a time when a large number of flat buyers have been left in the lurch, due to long delays in delivery with developers citing fund crunch

Back2basics

https://www.civilsdaily.com/story/insolvency-and-bankruptcy-code-2016/

 

Aug, 12, 2017

[op-ed snap] No level playing field

Image result for Insolvency and Bankruptcy Code, 2016.

Image source

Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

Op-ed discusses about the flaws in the Insolvency and Bankruptcy Code, 2016.

Once you are done reading this op-ed, you will be able to attempt the below.

“The Insolvency and Bankruptcy Code has loopholes to close down businesses instead of assisting entrepreneurs” Critically examine.

From UPSC perspective, the following things are important:

Prelims level: Insolvency and Bankruptcy Code, National Company Law Tribunal, Article 19(1)(g)

 Mains level: Insolvency and Bankruptcy Code, 2016- features, flaws, challenges.


News

Context

  • The Insolvency and Bankruptcy Code has loopholes to close down businesses.

Why Insolvency and Bankruptcy Code?

  1. It was enacted to improve the ease of doing business in India
  2. It aims to overhaul laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms, and individuals
  3. Attempts to ease the process of recovery of money by operational and financial creditors in a timely manner.
  4. Places the onus on professionals to put forth resolution plans within 180 days

A quick procedure

  1. Code looks to wrap up the process in 180 days.
  2. It warrants a notice of dispute to be issued followed by a response period of 10 days for the corporate debtor, failing which the creditor is entitled to file an insolvency application before the National Company Law Tribunal.
  3. Upon admission of the application, the moratorium period commences.
  4. At this stage, the existing management of the company loses complete control and all powers vest with an interim resolution professional, who has merely 30 days to put together all the relevant information and call for a meeting of the financial creditors.
  5. Once the financial creditors meet, they must appoint a resolution professional who will propose a resolution plan for the company.
  6. All such resolution plans are placed before the financial creditors. When at least 75% of the financial creditors approve, the plan is implemented by way of an order by the NCLT. If the financial creditors fail to arrive at a consensus, the default plan is to liquidate the company.

The flaws

  1. The Code has enough loopholes to close down businesses instead of assisting entrepreneurs.
  2. It fails to provide adequate safeguards to protect the rights of the company before handing over the management in its entirety to the resolution professional.
  3. Neither does the corporate debtor have an opportunity to put forth his/her case nor is there any scope of discretion provided to the adjudicating authority itself.
  4. At various stages, the Code fails to provide any opportunity to the corporate debtor to make a representation
  5. The Code is also deficient in providing a yardstick for the qualification of insolvency resolution professionals
  6. It allows for any person to access the information memorandum put together by the insolvency professional. There is no law protecting confidentiality and vitiates the fundamental right to business under Article 19(1)(g).
  7. Code prohibits withdrawal of the application once the same has been admitted. This means that there is no scope whatsoever for settlement
Oct, 04, 2016

Centre constitutes Insolvency and Bankruptcy Board

  1. Centre has constituted a four-member Insolvency and Bankruptcy Board of India (IBBI)
  2. Under the Chairmanship of MS Sahoo, who was till recently Competition Commission of India (CCI) Member
  3. Main activity: To regulate the functioning of insolvency professionals, insolvency professional agencies and information utilities under the Insolvency and Bankruptcy Code 2016
  4. Kudos! Centre had notified the Insolvency Code in May & the fact that IBBI has been constituted in a span of four months is a commendable effort
  5. Expansion: While the Centre has for now set up the IBBI with four members, going forward this will be expanded to 10 (including the Chairman)
Sep, 29, 2016

Insolvency bill moots 'creative destruction'- II

  1. The draft Bill also sets in place the creation of a Resolution Corporation
  2. It will comprise three ex-officio members representing the Ministry of Finance, the Reserve Bank of India, and the Securities and Exchange Board of India, respectively
  3. Additionally, there will be one member each nominated by the insurance and pension regulators
  4. Background: It was noted in Budget 2016 that there is a need for a comprehensive code for the resolution of financial sector companies
  5. This code, together with the Insolvency and Bankruptcy Code 2015, would provide a comprehensive resolution mechanism for our economy
Sep, 29, 2016

Insolvency bill moots 'creative destruction'- I

  1. A draft Financial Resolution and Deposit Insurance Bill 2016 has mooted the creative destruction of inefficient firms
  2. The legislation seeks to address insolvency issues in financial services companies
  3. In financial firms, zero failure of financial firms is not always possible
  4. However, it is important to ensure that the failure of a financial firm is orderly
  5. Why? So that consumers are protected and systemic stability and resilience are preserved, without relying on taxpayer-funded bail-out
May, 06, 2016

Cross-border pacts mooted to seize defaulters’ assets

  1. Context: Govt would enter into cross-border treaties
  2. Aim: To confiscate overseas assets of wilful defaulters and recover dues of banks even as the
  3. Background: In the wake of the Mallya episode
  4. Also after Congress indicated support, in principle, for the report of the Joint Parliamentary Committee on the Insolvency and Bankruptcy Code
  5. The Bill is considered a key to Govt’s agenda of improving the ease of doing business
Mar, 31, 2016

RBI submits defaulters’ list to SC

  1. Context: RBI submitted a list of big loan defaulters to the Supreme Court
  2. Undisclosed: The names were submitted in a sealed envelope because disclosing names may have an adverse impact on businesses
  3. Background: The court on 16 February made RBI a party ‘in public interest’ to a 2003 case related to bad loans
Feb, 05, 2016

Report on insolvency and bankruptcy code expected by March end

  1. The joint committee of Parliament studying the insolvency and bankruptcy code will submit its report by the first week of March
  2. Whenever there was global economic turmoil in the past, India has always shown resilience, including the global financial crisis in 2008-09
  3. Jaitley invited the foreign investors in roads, highways, oil and gas, urban infrastructure and railways, during India Investment Summit 2016
  4. The National Infrastructure and Investment Fund (NIIF) would be the major driving force for investments in to India’s infrastructure 2016-17 onwards
Jan, 19, 2016

The big fish: don't let the big defaulters escape

Raghuram Rajan rightly cautions India against being seen as a weak state that lets off the well-connected loan defaulters.

  1. We are accused of not having the administrative capacity of ferreting out wrongdoing.
  2. Dominant banking culture in India works like a net that lets the big defaulters escape without any penalties by restructuring their debts.
  3. Amount recovered from cases decided in 2013-14 under the Debt Recovery Tribunals was just 13 per cent of the total amount at stake.
  4. Worse still, these cases were estimated to take 4 years, instead of the mandated 6 months under the law, to resolve.
  5. RBI initiated the Strategic Debt Restructuring (SDR), which allows creditor banks to convert their unpaid loan into equity and take a majority ownership of the troubled firms.
  6. Government can help by passing the long-pending bankruptcy code.
  7. Key reasons why large defaulters tend to get away is that they can seek legal recourse, which is a very long-drawn-out process in India.
Dec, 22, 2015

Centre tables bankruptcy Bill in Lok Sabha

The Centre tabled the Insolvency and Bankruptcy Bill, 2015 in the Lok Sabha, which enhance the ease of doing business in the country.

  1. The proposed Bill aims for a complete renovation of the current insolvency and bankruptcy system in India.
  2. It will help streamline the procedure of revival of companies facing financial distress.
  3. The Bill proposes adherence to strict deadlines to decide whether to liquidate a sick firm or not.
  4. The Bill proposes the setting up of an Insolvency and Bankruptcy Board of India to regulate insolvency professionals and agencies.
  5. It also proposes the setting up of a fund dubbed the Insolvency and Bankruptcy Fund of India.
  6. A recent survey found that the average duration for insolvency resolution in India is 4.3 years.
Nov, 23, 2015

Insolvency resolution in India plagued by wide range of problems: report

The average duration for insolvency resolution in India is 4.3 years, significantly higher than that of South Asia region (2.6 years) and that of OECD high-income countries (1.7 years).

  1. A survey of Indian companies by the consultancy also found that there are systemic problems in the way stressed assets are relieved currently.
  2. SARFAESI [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act] gives secured lenders the legal right to replace ineffectual management.
  3. It is impossible to achieve, as promoters tend to litigate and the long time taken for resolution in the current judicial system leads to severe degradation in value of the assets.
  4. The report recommends that the proposed National Company Law Tribunal should have a separate bench for handling bankruptcy cases.
Nov, 06, 2015

Bankruptcy panel calls for insolvency regulator

Proposed Bankruptcy Code will replace over a century old insolvency act, Presidency Towns Insolvency Act, 1909, ensures time-bound disposal of insolvency application.

  1. Bankruptcy Law Reforms Committee (BLRC), headed by TK Vishwanathan.
  2. It suggested setting up an insolvency regulator to exercise regulatory oversight over insolvency professionals and agencies.
  3. To ensure speedier winding up of insolvent companies and providing easier exit route to investors.
  4. Recommended, bankruptcy & insolvency processes for individuals with annual gross income of less than Rs 60,000 and aggregate assets of not more than Rs 20,000.

India lacks an effective overarching mechanism to ensure quick winding up of businesses and compensation to other stakeholders.

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