Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in

Page created by Kathy Ball
 
CONTINUE READING
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Contents
           Preface p2/ Foreword p3/ Journey of IBC since inception p4/
           Survey Results p10/ About CII p24/ About PwC p25

Decoding the Code:
Survey on Twenty One
Months of IBC in India

                                                 www.pwc.in
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Preface
The Insolvency and Bankruptcy Code           IBC has also driven massive M&A
(IBC or Code) is one of the most effective   momentum in the country; several
reforms brought in with the potential        domestic and international investors
of transparently and expeditiously           (including private equity firms) have
resolving India’s overwhelming non-          been actively participating, given the
performing assets (NPAs) conundrum.          opportunity to acquire valuable assets
With a strict 180+90 days ‘resolve-or-       at attractive prices, with the prospect of
liquidate’ diktat, the Code has received     generating higher returns.
commendation, not only from the Indian       The apprehension of losing control over
Industry, but from the global fraternity,    their companies has prompted various
including The World Bank and IMF, and        promoters to settle or resolve their dues;
has materially contributed to India’s        which presents a huge opportunity for
30 place jump in 2018’s ‘Ease of Doing       investors. Going forward, IBC legislation
Business’ ranking.                           should become a significant catalyst for
IBC truly enforces the concept of            improving debtor behaviour.
‘creditor in control’ instead of ‘debtor     This report highlights the perspectives of
in possession’, and maximises value          different stakeholders, on the progress
recovery potential corporate debtors.        made by the Code, challenges faced
Once the resolution process starts, the      and impediments that merit further
board cedes control of the company, and      attention. The report is also backed by a
insolvency professionals, with the help      detailed survey of key stakeholders, who
of professional advisors, start managing     have shared their experiences thus far.
the company.
                                             We hope this report will be helpful to
                                             gain an interesting perspective of the
                                             journey of the Code so far.

                                             Confederation of Indian Industry

2   PwC
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Foreword
                                              Most of the IBC changes affected the             Cross border insolvency regulations:
                                              borrower, the outgoing owners and                These need to be urgently notified. Non
                                              the investor or resolution applicant             recognition of Indian laws in overseas
                                              community. In particular, investor               jurisdictions, and vice-versa, has created
                                              groups and resolution applicants have            certain challenges. It also leads to
                                              felt that they have been chasing a               uncertainty amongst foreign investors
                                              ‘moving target’. As far as investors are         on recovery procedures. Another major
                                              concerned, while they would like a lot           drawback are bilateral treaties, which
                                              more certainty this has not dimmed               result in non-uniform approaches to a
Sanjeev Krishan                               their focus on assessing investment              resolution process.
Partner & Leader                              options arising from the enactment of
                                              the IBC. They have focussed both on              Group insolvency rules:
Deals and Private Equity
PricewaterhouseCoopers Private Limited        determining opportunities to resolve             It has been observed, particularly in case
                                              and revive businesses in insolvency, as          of infrastructure and EPC sectors, that
                                              well as ensuring that they do not miss           the holding company is put through the
                                              out on the pre-insolvency investment             insolvency process, but the subsidiary
In the usual course, it is hard for any
                                              themes, where promoter groups have               companies are not. In these cases, the
business to take action against its
                                              become more willing to go that extra             experience has been that the resolution
customers, no matter what challenges
                                              mile to resolve issues with banks. This          for individual companies is tough and
it faces. The story has been no different
                                              is emerging as the biggest opportunity           some of these face liquidation, as opposed
for banks and the wider institutional
                                              and more than the IBC, it is the fear of         to resolution. A combined resolution
lending platforms in India. It is quite
                                              IBC that is generating a lot of investor         plan for debts for the group could
easy to start debating the reasons why
                                              interest. The bankers have not been              prevent this from happening and result in
they find themselves in this situation, but
                                              far behind and many of them have                 maximisation of value for lenders.
that is not the intent of this publication.
                                              considered portfolio trades or pre-
No wonder then the Reserve Bank of                                                             Dissenting creditors given preference:
                                              insolvency single asset resolutions
India, underpinned the enactment of
                                              (pursuant to the circular dated                  More often than not, dissenting creditors
the Insolvency and Bankruptcy Code
                                              12 February 2018) in recent times.               are given the benefit of payments as
2016 (IBC or the Code), to get down to
                                                                                               opposed to assenting creditors. This is
‘resolving’ the challenge that they faced–    While various issues that have been
                                                                                               causing an interesting dynamic to play
the mountain of Non-Performing Assets         raised over the last few months, have
                                                                                               out–in case the initial or upfront infusion
(NPAs) that they carried on their books,      been clarified basis interactions with
                                                                                               of funds is less, it is quite possible that
which as per the latest estimates, exceed     the lending community and investors
                                                                                               assenting creditors get nothing to begin
10.25 lakh crores INR (approximately          in particular, some still require
                                                                                               with. This is making assenting creditors
150 billion US$) as on 31 March 2018.         additional consideration:
                                                                                               look at the proposed resolution plans
The IBC has been a revelation, both in        Conflict amongst lenders:                        a bit differently–again this will have
its original and (current) revised form;                                                       the effect of pushing many insolvent
                                              Typically, an insolvent company has
it is important to note that the IBC has                                                       businesses into liquidation.
                                              multiple lenders with multiple charges
seen multiple changes since its inception,    spread across various assets. The IBC            Judicial infrastructure enhancement:
most of which have been well directed.        disregards differential rights across
At the outset, kudos to the regulators                                                         At the moment, there are 11 NCLT
                                              the same asset class that lenders have
for being so agile in plugging potential                                                       benches and 1 NCLAT bench. There have
                                              funded differentially. This has resulted in
loopholes in the initial version of the                                                        been challenges to cope with the huge
                                              conflicts amongst lenders and subjected
Code. Considering that the Code was                                                            number of cases that have got referred to
                                              resolutions to legal challenges.
initially being tested on the twelve                                                           them, causing further delays.
largest NPAs in the banking system, this      Operational creditors’ rights:                   The IBC has been a landmark legislation
was much needed. Twenty One months            Many resolution plans are currently being        and it will continue to evolve. While
since the enactment, one can say that         litigated by operational creditors, due to       some of the matters listed above came
there is a reasonably robust insolvency       near zero or very small amounts provided         across as areas, which require more
law. So much so, that some of the             for them in resolution plans. While they         thought and consideration, the issue
questions that this survey raised with the    are eligible to get a share of the liquidation   that IBC deals with is such that there will
participants have been “answered” even        value, in most cases, the liquidation value      always be other unforeseen challenges.
before the results could be published!        is very low and insufficient to pay even
                                                                                               This survey presents the feedback
                                              financial creditors— accordingly they have
                                                                                               received from investors, lenders as well
                                              been challenging resolutions. While some
                                                                                               as the legal community.
                                              of them have managed to force the issue,
                                              most of the operational creditors in the         We hope you find the report interesting
                                              MSME space are not able to do the same,          and informative. We look forward to
                                              and hence, groups of operational creditors       your feedback.
                                              are coming together to litigate.

                                                                          Decoding the Code: Survey on Twenty One Months of IBC in India    3
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Journey of IBC since inception
            Non-performing assets (NPAs) have              and banks invariably got into severe
            become a major challenge for both public       competition with each other to fund
            and private sector banks in India. In the      mega projects. The GFC followed by a
            exuberant milieu that started around           period of policy in action meant that
            2005 and continued for three years until       these large projects either remained
            the global financial crisis (GFC) of 2008,     work-in-progress owing to delayed
            large corporations conceived major             environmental or approvals, or even if
            projects in capital-intensive sectors such     completed, under-utilised. As project
            as power, ports, airports, housing and         owners did not realise anticipated cash
            highway construction. Banks were keen          flows over extended periods of time,
            lenders, with their aims of supporting         bank loans began to go sour, thereby
            the capacity build up in core sectors such     triggering the significant NPA build up.
            as power and steel, as well as India’s         Accordingly, the NPA story is not new to
            infrastructure development across roads,       India and several steps have been taken
            ports and real estate sectors. Considering     by the Government on legal, financial
            how under invested India was and the           and policy level reforms—most of these
            huge consumer market it presented,             had moderate to low success.
            this seemed to be a big opportunity

            Figure 1.1 - Debt resolution mechanisms in India had evolved since 1985…

                  Sep – 2016                 Dec – 2016                   Feb – 2018

                  Asset Reconstruction       Insolvency and               Resolution Plan under
                  Companies (ARC)            Bankruptcy Code (IBC)        RBI guidelines which
                                                                          subsumes previous          2018
                                                                          schemes

                  Dec – 2014                 Jun -2015                    Jun – 2016

                  Flexible Structuring of    Strategic Debt               Scheme of Sustainable
                  long Terms Loan (5:25)     Restructuring (SDR)          Structuring of Stressed
                                                                          Assets (S4A)

                  2002                       2014                         Jan – 2014

                  SARFAESI Act – ARCs        Announced asset              Revitalising Distressed
                                             classification forbearance   Assets in the Economy
                                             on Restructuring ended       (SMA and JLF)
                                             from MAR-15

                  1985                       1993                         2001

                  Sick Industrial            Recovery of Debt dues        Corporate Debt
                  Companies (Special         to Bank and Financial        Restructuring Cell (CDR)
           1985   provisions) Act (BIFR)     Institutes Act (DRTs)

4   PwC
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
The Sick Industrial Companies (Special      The RBI also instituted several              • The Strategic Debt Restructuring
Provisions) Act, 1987, popularly known      mechanisms to deal with NPAs from time         (SDR) mechanism, introduced soon
as ‘SICA’ was enacted to address sickness   to time, a few of them are as follows:         after, was also not lucrative for
in the industry. It was under this                                                         lenders. While the scheme seemed
enactment that the Board for Industrial     • Corporate Debt Restructuring (CDR),
                                                                                           interesting initially, it soon became
and Financial Reconstruction (BIFR)           which was purely a contractual
                                                                                           evident that there were no buyers in
was formed to oversee the rehabilitation      arrangement between the lender and
                                                                                           cases where it was being invoked.
of sick units. However, instead of            the corporate. It thrived and met with
addressing sickness in the industry, BIFR     success given the revised prudential       • The RBI then introduced the S4A
itself became a sick institution and a        norms on restructuring of advances.          Scheme, which only covered projects
refuge ground for defaulting borrowers        However, once prudential norms               that had already started commercial
who tried to take advantage of the            were withdrawn in 2015, the CDR              production. Furthermore, the scheme
indefinite moratorium under SICA.             mechanism also lost its purpose.             was also silent about unsecured
                                                                                           creditors, who could always approach
Then the Securitisation and                 • The so-called Joint Lenders’ Forums
                                                                                           a court of law and play spoilsport.
Reconstruction of Financial Assets            (JLFs), which mandated that banks
and Enforcement of Securities Interest        adopt measures for early identification    These measures, though in the right
Act, 2002 (SARFAESI Act ) was                 to tackle stressed loans, giving them      direction, did not have the desired result.
enacted to let banks as well as other         a jumpstart, especially in large and       There was now a dire need to address
financial institutions of India auction       complex cases of corporate debt where      the growing NPA.
commercial or residential properties          creditors differed on a resolution
for the purpose of loan recovery. Asset       process. According to the JLF
Reconstruction Company India Limited          framework, at least 75% of creditors by
(ARCIL), the first asset reconstruction       value of the loan and 60% by number
company, was established under this           of lenders in the JLF need to agree
act. However, SARFESI too had its own         on the restructuring plan. Obtaining
set of limitations.                           a consensus was a major bone of
                                              contention, which in turn, reduced the
                                              effectiveness of JLF.

                                                                    Decoding the Code: Survey on Twenty One Months of IBC in India   5
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Insolvency and Bankruptcy Code: a new dawn

Institution of IBC                           The Code has also received significant          IBC consolidates multiple schemes
                                             attention from foreign investors.               announced earlier and focusses on a
and its objectives
                                                                                             time-bound resolution coupled with
                                             IBC brings about a paradigm shift in
Insolvency and Bankruptcy Code                                                               maximisation of value. The RBI, in order
                                             the recovery and resolution process by
(IBC) was enacted in 2016, with the                                                          to align the resolution mechanism with
                                             introducing the concept of ‘creditor in
objective of ensuring speedy resolutions                                                     IBC subsequently withdrew all circulars
                                             control’ instead of ‘debtor in possession’.
while signalling a break from the past.                                                      such as the CDR, the Flexible Structuring
                                             This encourages value enhancement of the
There were large macroeconomic                                                               of Existing Long Term Project Loans,
                                             corporate debtor as once this process starts,
objectives at play such as solving the                                                       SDR, Change in Ownership outside SDR,
                                             the board cedes control of the company,
twin balance problem, developing                                                             5 by 25 scheme and S4A. The JLF—as an
                                             and insolvency professionals with the help
a robust corporate bond market,                                                              institutional mechanism for resolution of
                                             of advisors start managing the company.
improving the credit environment,                                                            stressed assets was also discontinued. `
                                             Creditors now have guidelines that
and consequently providing a fillip to
                                             clarify details till the last mile, including
India’s competitiveness as a business
                                             distribution of recovery proceeds.
destination. The new code was designed
to streamline the corporate insolvency
resolution process, which among other        Figure 1.2 – recap of IBC
things, prevents value destruction
if there is corporate distress. The
                                              ‘One’ Law for bankruptcy                        Time-bound process
resolution process is a representative
action for the general body of creditors
and not for the recovery of money of an                                                      180       days to resolve insolvency
individual creditor.                          2 laws repealed            11 amended                    days, if extension is granted in
Being a time-bound process to resolve                                                        270       some circumstances
cases within 180 days extendable to 270
days, the IBC has received praise from the
World Bank and IMF and has materially         No deadlock                                     No asset stripping
contributed to India's 30 place jump in       Bankruptcy resolved in prescribed time          • Creditor is king and IBC is creditor driven.
2018’s 'Ease of Doing Business' ranking.      If not resolved on time—assets to be              Creditor indirectly takes control of the
                                              sold (liquidation)                                board/assets of debtor
                                                                                              • Insolvency professionals takes charge of
                                                                                                assets on behalf of creditors

6   PwC
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Infrastructure to support the               suggest modifications required by the         After the introduction of IBC, there was a
                                            IBC to fine tune it and plug-in loopholes.    possibility of an alternate interpretation
implementation of IBC
                                            The recommendations of the committee          of the code. Promoters would bid for
In less than a year of its enactment,       that were accepted were brought in as         their businesses in an attempt to retrieve
new networks of the National Company        amendments to the Code. For instance:         them at a heavy discount and start
Law Tribunal (NCLT), the new                                                              afresh with a clean balance sheet. As
                                            • Homebuyers to be treated at par with
regulator ‘Insolvency and Bankruptcy                                                      this was not the intent of IBC, suitable
                                              financial creditors—they can also take
Board of India’ (IBBI), new stream of                                                     amendments were made, after which
                                              builders to bankruptcy court
professionals ‘Insolvency Professionals’                                                  it is extremely difficult for defaulting
(IPs), new stream of Information            • Lenders to decide turnaround or             promoters to participate in the resolution
‘Information Utilities’ (IUs) and             liquidation by 66% vote, down from          process of the corporate debtor.
Insolvency Professional Agencies (IPAs)       75%— decision-making easy
                                                                                          The amendments are not only limited
were established to control and monitor
                                            • Redefines entities disqualified from        to IBC, but the entire eco system. One
the IPs’ registrations and proceedings.
                                              bidding for bankrupt firm—widens the        such measure was to raise the minimum
The IBBI charted the course of it’s
                                              pool for bidders                            upfront payment made by ARCs from
implementation under the guidance of
                                                                                          5% to 15%, which discourages the use of
the Ministry of Corporate Affairs (MCA),    • Withdrawal of application admitted
                                                                                          ARC platforms by lenders for long-term
Government of India.                          under IBC by approval of 90%
                                                                                          warehousing of bad loans. Furthermore
                                              lenders—exit opportunity to corporate
                                                                                          the market regulator Securities and
                                              debtors for better settlement outside
Fine tuning IBC                                                                           Exchange Board of India (SEBI)
                                              IBC purview
                                                                                          exempted companies under the IBC from
Constant improvements and updates
                                            • MSME promoters can bid for their            adhering to prescribed delisting norms
to IBC have followed in response to
                                              enterprises, which are undergoing           with certain riders.
the feedback received and practical
                                              Corporate Insolvency Resolution (CIR)
experience of processes under execution.
                                              process provided they are not wilful
To its credit, the Government has been
                                              defaulters—big relief to MSMEs
willing to hear out suggestions. An
expert committee was constituted to

Pillars of IBC - Equality, transparency, resolution and pace
IBC is modelled towards maximisation        efficient and impartial resolution and        in the public domain provide the perfect
of value of assets, striking a balance      ensuring a transparent and predictable        opportunity to analyse the performance
between liquidation and reorganisation,     insolvency law with incentives to gather      of the NCLT as an institution.
ensuring equitable treatment of similarly   and dispense information. The judicial
situated creditors, provision of timely,    orders that are transparently available

                                                                     Decoding the Code: Survey on Twenty One Months of IBC in India   7
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
All is not well…yet:                         Significant delays                             Dealing with contingent
ground realities                             in resolution:                                 liabilities:
The IBC has been touted as the knight        IBC has been widely acknowledged               Most companies have varied pending
in shining armour to salvage the NPA         as a beacon of hope for creditors who          litigations—tax, statutory dues,
situation, accordingly, expectations from    have, for years, been waiting for justice.     government dues, labour litigation and
it have surged. Though much ground           However, in most of the cases the              other commercial disputes. Resolution
has been covered over last 21 months,        threshold of 270 days has been breached        applicants have less clarity on whether
there are certain concerns, which may        because of procedural inefficiencies,          and to what extent such dues will be
require attention.                           lack of infrastructure and other frivolous     discharged as a part of CIRP. Contingent
                                             matters. Not only does this jeopardise         liabilities by nature cannot be reliably
                                             the basic premise of resolution within         estimated. Hence, it will be difficult
Lack of momentum from                        270 days but also results in notional loss     to value the company and it requires a
investor community:                          of interest income for lenders with every      lot of risk analysis before presenting a
The M&A activity in the stressed assets      day of delay.                                  resolution plan.
space has not been complemented by the
much spoken enthusiasm of investors          The matter of                                  Lack of clarity in case of
and a conducive investment landscape.
Many investors are waiting on the
                                             ‘operational’ creditors:                       security charge on an asset:
side-lines to gauge the outcome of the       As a part of the mandatory contents of         A typical corporate debtor has multiple
settlement of big cases and evolution        the resolution plan, operational creditors     lenders with multiple charges spread
of IBC before investing. Furthermore,        should get a share of the liquidation          across various assets. IBC disregards
these modifications to IBC have not put      value. However in most of the cases, since     differential rights across the same
to rest certain looming issues, which        the liquidation value is very low and is not   asset class that lenders have funded
are of concern to investors relating to      even sufficient to pay financial creditors,    differentially. This results in conflicts
operations of plants in India following      the value due to operational creditors         amongst lenders with different levels
transfer of assets under the IBC, period     stands at Nil. This is the major reason for    of risk and hamper liquidity in the
of commitment towards the units and          many ongoing cases filed by operational        debt market.
expected timelines to close the allocation   creditors, requesting the NCLT to pass the
                                                                                            No provisions to curtail number of
process. Certain sector-specific concerns    order of their respective payments.
                                                                                            bids: It is well understood that though
with companies under the IBC may require
                                                                                            it is the mandate of the IBC to promote
intervention from the Government.
                                             Single bidder—liquidation                      maximisation of the value of assets of a
                                             v. resolution:                                 company, it is often forgotten that the
Sectoral challenges:                                                                        essence of time is equally important
                                             In some cases companies have received          and the resolution applicants often get
Sectors such as infrastructure and power     only a single bidder’s interest, but           caught at the helm of the lenders call for
are facing challenges due to uncertain       lenders have been unable to approve            re-bidding and revision of bids.
and unattractive tariffs or realisations,    resolution plans as the bid values are
low plant load factors due to raw            much lower than the liquidation value.
material uncertainty or lack of support      Lenders have preferred the liquidation         Alignment with other laws
from suppliers to whom amounts               route—however, it is quite probable            and exemptions:
are due. Hence, bidding interest and         that the liquidation process will extend
resolution for some types of assets may                                                     The resolution plan needs to be aligned
                                             for months and the value realised at
remain uncertain and accordingly,                                                           with all other laws in force at the time and
                                             the end may further erode from current
lenders may appear keen on keeping                                                          the resolution applicant does not enjoy a
                                             estimates considering rising operational
these assets out of the NCLT.                                                               lot of exemptions with respect to taking
                                             costs and insufficient cash flows. Hence,
                                                                                            over the management of a company. For
                                             there should be a framework to enable
                                                                                            example, there is no exemption in the
                                             conclusive decision-making where at
                                                                                            Income Tax Act for payment of tax on
                                             least one bid is on the table, even if the
                                                                                            book profit due to write-off of liabilities
                                             perceived value creates higher haircuts.
                                                                                            under the resolution plan.

8   PwC
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
The road ahead                                 SME resolution approach
Following are some key measures that           Below INR   50 Crore
are on the anvil:                              • Banks to develop template resolution approached
                                               • Set up empowered SME steering committee
Project Sashakt:
A high-level committee on restructuring        Bank led resolution approach
stressed assets and creating more
value for public sector banks (PSBs)           INR   50-500 Crore
has suggested a transparent market-
                                               • Lead bank to implement resolution plan in 180 days
based solution with a focus on asset
                                               • Independent screening committee to validate process in 30 days
turnaround to ensure job protection and
creation, i.e., Project Sashakt.
                                               AMC/AIF led resolution approach
Project Sashakt sketches the resolution
of bad loans, depending on their size          INR   500 Crore or more
and is designed to address bad loans and       • PSB takes lead in setting up Asset Management Company
strengthen the credit capacity, credit         • Assets will be put up for bidding
culture and portfolio of PSBs.
                                               • AIF will raise funds from Institutional Investors

Cross border insolvency:                       Better future!!
IBC currently has provisions relating to       IBC has instilled a sense of urgency                  will create a sense of transparency and
cross border insolvency but these are          among all stakeholders to resolve                     spur investor confidence in the financials
not adequate to effectively deal with          bad loans. The fear of losing control                 of banks while changing the way banks
many default cases. This does act as a         over their companies has prompted                     do business. Increased prudence is
deterrent for attracting investments. A        various promoters to settle or resolve                expected in lending, and there is likely
draft bill is in progress and hopefully will   their dues, which presents a huge                     to be improved diligence and appraisal
be enacted after due diligence.                opportunity for investors.                            when funding large projects. At the
                                                                                                     same time, the corporate entities too will
                                               In the long run, IBC, Project Sashakt and             need to be more cautious or attentive
Impact of RBI circular dated                   the RBI circular dated 12 February 2018               with loan covenants as the tolerance for
12 February 2018:                              will bring a good structural change that              defaults is being lowered considerably.
                                               could strengthen the banking system. It
In an effort to hasten the resolution of
bad loans, the RBI tightened its rules to
make banks identify and tackle any non-
payment of loans rapidly. Lenders will
identify incipient stress in loan accounts
immediately on default, by classifying
stressed assets as special mention
accounts (SMA). If the principal or
interest payment or any other amount is
wholly or partly overdue, the account
will be categorised as SMA-0 for one
to 30 days, SMA-1 for 31-60 days, and
SMA-2 for 61-90 days. Lenders will
be required to report defaults on a
weekly basis.
The regulation provides for a strict
180-day timeline for banks to agree on
a resolution plan in case of a default or
else refer the account for bankruptcy.
The 180-day deadline for the first
set of cases ends in the last week of
August 2018 and it will be interesting
to see the number of cases that are
mandated for insolvency.

                                                                            Decoding the Code: Survey on Twenty One Months of IBC in India    9
Decoding the Code: Survey on Twenty One Months of IBC in India - www.pwc.in
Survey Results
            The Insolvency and Bankruptcy Code (IBC or Code) was introduced with a
            larger macroeconomic objectives at play such as solving the twin balance
            problem, developing a robust corporate bond market, improving the credit
            environment, and consequently, providing a fillip to India’s competitiveness as
            a business destination. The new Code was designed to streamline corporate
            insolvency resolution process, which among other things, prevents value
            destruction if there is corporate distress.

            The IBC has been in focus given the respite it promises to various stakeholders
            and its ability to expeditiously resolve large amounts of NPA and debts. With
            this backdrop, PwC conducted a detailed survey and interviewed various
            stakeholders representing the Lender community, the Investor community and
            the Legal fraternity.

            Survey methodology adopted:
            Senior management of companies active in IBC participated in our survey.
            The survey responses were obtained either through an online questionnaire or
            detailed interviews conducted with the respondents. The survey respondents,
            who had first-hand knowledge of the challenges and issues faced on the
            management of stressed assets, took out valuable time to share their
            experiences and knowledge about the Code.

            The survey respondents were a mix of CFOs, Tax Directors, Strategy, Finance
            and Legal professionals, Private Equity funds, Asset reconstruction companies,
            Investment Bankers and Bankers of companies across various industries who
            are actively involved in the IBC process.

10 PwC
The Investors’ Perspective
PwC conducted a detailed survey among           The enactment of the IBC has caught           were of the view that the introduction
private equity funds, asset reconstruction      the attention of domestic and foreign         of IBC is the most favourable recent
companies and strategic investors, both         investors who are now looking at the          amendment in the tax and regulatory
in India and abroad—to collate investor         distressed asset space in a new light. An     laws aiding investments in the Indian
perspectives.                                   astounding 83% of survey participants         distressed asset space.

Stressed assets: big, actionable and lucrative
Around 60% of respondents said that             significantly above the average M&A deal
they are likely to allocate more than 100       size over the last decade (see Figure 1.1).
million US$ to distressed deals—which is

Figure 1.1 – How much funding will you allocate to distressed assets?

           8%                          31%                         31%                        23%                          7%

           None                        Up to                    US $ 100 to             US $ 500 million to        Above US $ 1 billion
                                   US $100 million               500 million              US $ 1 billion

Opportunities: actionable
and attractive?
One in every five participants believed
that, of all the distressed deal
opportunities that they evaluated in
the last year, more than 25% deals
represented an actionable and attractive
investment opportunity; however, a
majority of investors were very choosy
about actionable deals and believed
that only 10% of all the deals that
they evaluated were investible ideas.
However, investors across every group
expect IRRs in the range of 20-25% on
their distressed asset investments.

                                                                          Decoding the Code: Survey on Twenty One Months of IBC in India 11
Sector biases
More than 80% of investors surveyed             sector—spanning industries such as                the investors surveyed also evaluated
by PwC had a significant bias towards           metals, chemicals, pharma, cement and             deals in the infrastructure, power and
distressed deals in the manufacturing           discrete manufacturing. More than half            real estate sectors (see Figure 1.2).

Figure 1.2 – What would be your preferred sectors for distressed deals?

       83%                     83%                     58%                      58%                      50%                       33%

    Manufacturing               Metals                  Power                 Real Estate             Infrastructure              Chemicals

The dream: turnaround potential
More than half of the survey respondents
                                                Figure 1.3 – What are your key reasons for investing in distressed deals?
cited turnaround potential as the key
reason why distressed deals were of
interest to them—indicating their belief
in either positive macro-economic
tailwinds or their ability to influence
better performance for their investee                   55%                      9%                      18%                      18%
companies (see Figure 1.3). The
sheer scale of the opportunity and the
opportunity to make high returns were
also cited by investors.                         Turnaround potential     Favourable regulatory   Attractive valuations            Other
                                                                             and tax regime

Vehicle of choice: asset reconstruction company (ARC)
More than two-thirds of investors
                                                Figure 1.4 – What is your preferred vehicle for investing in distressed assets?
prefer the ARC route for distressed
asset investments (see Figure 1.4). This
further underlines the importance and
effectiveness of the ARC as an investment
vehicle, since it is the only vehicle, which
can acquire loans on a secondary basis in                 67%                                16%                                  17%
an efficient manner.
It will also be important to note that
the survey was conducted after the
introduction of Foreign Portfolio Investor         Asset Reconstruction              Alternative Investment               Foreign Portfolio
(FPI) concentration norms. These may                 Company (ARC)                         Fund (AIF)                      Investor (FPI)
have resulted in a reduced preference
for FPIs as a vehicle for investing in
Indian distressed assets (through
Bond investment).

12 PwC
Investment challenges
According to our survey results,                   Figure 1.5 – What are your biggest challenges
45% of participants believe that the               when investing in distressed assets?
top challenge for distressed asset
investments is the uncertainty in legal
processes (see Figure 1.5). In the 20
months since the IBC has become
effective, there have been a plethora of
amendments including an ordinance to                        45%                       27%
make changes to the original law.
Furthermore, there was a complete
overhaul in the framework prescribed                    Uncertainty of            Regulatory and
for banks in dealing with stressed assets.              legal process             tax framework
The frequency of such changes and the
magnitude of their impact are a major
concern for investors.
Interestingly, valuation mismatch was                        9%                      18%
of least concern, and investors are
flexible when seeking to consummate a
transaction, provided the deal opportunity
shows sound return potential.                      Stretched timelines for          Valuation
                                                   set up of platform and           mismatch
                                                    finalisation of deals

Deep dive: legal and regulatory investment challenges
Around 60% of investors cited the                   Investors also noted the following                  • Thin capitalisation rules - for related
introduction of concentration norms                 factors as impairments to distressed                  party debt under Indian income tax
for FPIs as the biggest tax or regulatory           asset investments:                                    laws. The provisions of the Income tax
concern for distressed investments                                                                        laws provide an exemption to banks
                                                    • Section 29A in the IBC - pertaining to
(see Figure 1.6).                                                                                         and insurance companies from the
                                                      the eligibility criteria for bidders. This
                                                                                                          applicability of thin capitalisation rules.
The Government and regulators should                  also impacts Indian borrowers, who
                                                                                                          However, ARCs - who become lenders
take note of this particular concern,                 may be deemed as related parties,
                                                                                                          pursuant to the acquisition of loans -
given the importance of attracting                    by virtue of the quantum of debt
                                                                                                          are not exempted from these provisions
foreign investment in resolving the                   investment in the books of the borrower
distressed assets issue.

                                                                                                        Other significant concerns raised by
Figure 1.6 – What is the biggest tax/regulatory hurdle that will impact distressed asset investments?
                                                                                                        investors, regarding Income tax laws, were:
                                                                                                        • The applicability of Minimum Alternate
                                                                                                          Tax (MAT) on the write-back of loans
                                                                                                        • The inheritance of past tax liabilities
         58%                      8%                       17%                      17%                   of the borrower
                                                                                                        When asked about what they would
                                                                                                        like to change most about the current
                                                                                                        tax or regulatory guidelines, 80% of
   Foreign Portfolio Thin capitalisation rules         Introduction of       Revised framework for      participants picked the non-applicability
        Investors     for related party debt           section 29A in        resolution of stressed     of the provisions of Section 50CA and
 concentration norms under Income-Tax Act              IBC (regarding           assets by banks         Section 56(2)(x) of the income tax law,
   for investment in                                       bidders)              (introduced in         which deal with taxability of shares /
   corporate bonds                                                              February 2018)
                                                                                                        assets at a price negotiated below the
                                                                                                        fair value (as per income tax norms).
                                                                                                        This is relevant to acquisitions made
                                                                                                        under Resolution Plan. Participants also
                                                                                                        desired waiver of stamp duty on the
                                                                                                        acquisition of the borrower entity.

                                                                                 Decoding the Code: Survey on Twenty One Months of IBC in India 13
Restructuring challenges
Unlike the investment phase, where
legal, tax and regulatory hurdles were       Figure 1.7 - What are your biggest challenges when restructuring distressed assets?
cited by respondents as their biggest
challenges, for actual restructuring
efforts, indecisiveness of creditors,
legal wrangles and non-cooperation of
promoters have been flagged as biggest
obstacles (see Figure 1.7).
                                                          37%                           18%                            27%
37% of the participants found that
the indecisiveness of banks and other
creditors was the key obstacle in
restructuring efforts. It could be a
good feedback for creditors as well as
                                                 Indecisiveness of banks             Delays due to              Obstructions / delays
legislators to take note of these concerns
                                                   and other creditors               legal process                 by promoters
voiced by the investor community. It
will be useful to have a more conducive
environment for banks and other
lenders to give them requisite space
and authority to take relevant decisions
concerning NPAs in a flexible manner.
Furthermore, though IBC has been                                           9%                            9%
introduced as a law with time-bound
resolution, one needs to work around
delays on the ground to ensure
that the legal system does not lose
its effectiveness.                                          Regulatory approvals / conditions Availability of experienced
                                                                   for closing of deal         resolution professionals

Well begun is half done, but…
The introduction of IBC has                  opportunities for investors and a               relate to legal, tax and regulatory
revolutionised the way in which              warning to defaulting borrowers that            bottlenecks, inflexibility of creditors
investors, creditors and borrowers           they can no longer act with impunity.           and non-cooperation of promoters. The
interact with each other. It promises                                                        Government has more work to do on
                                             However, there are several challenges
a transparent means to creditors to                                                          these counts, if it expects to accelerate
                                             that need to be ironed out if investments
recover dues, sizeable and high-return                                                       the resolution of this debt debacle.
                                             are to be catalysed. These issues

14 PwC
The Lenders’ Perspective
The IBC brings about a paradigm shift in       A survey was undertaken on IBC to
the resolution process by introducing the      gauge the responses of bank officials
concept of ‘creditor in control’ instead of    between 1 April 2018 and 30 June
‘debtor in possession’. This encourages        2018 (Survey Period). However, some
value enhancement of the corporate             of the survey questions have already
debtor, since once the process starts, the     been addressed by amendments to
board cedes control of the company, and        IBC after the launch of the survey.
insolvency professional, with the help of      Nevertheless, the survey responses
professional advisors, starts managing         provide some interesting perspectives
the company. It is very essential to           on the lenders’ outlook.
understand how lenders perceive IBC,
given that in a way they primarily
drive the process.

IBC: preferred resolution mechanism to recover dues
More than two-thirds of lenders (see           The RBI, on 12 February 2018,
Figure 2.1) preferred a resolution             ordered lenders to initiate bankruptcy
through IBC for recovery of dues, since        proceedings within 180 days of default
it balances their twin objectives of           on a single payment. Defaulting
enhancing recovery and turnaround              promoters have to find ways to bring in
time. The remaining one-third indicated        more capital; else, they face insolvency
their preference for mechanisms                proceedings. This may have resurrected
other than IBC, i.e., sale to ARC and          ARCs, which buy NPAs from financial
restructuring of debt.                         institutions at a discount to book value
                                               and clean up their balance sheets. While
Asset Reconstruction Companies
                                               guidelines under the recently launched
(ARCs), created under the ambit of the
                                               ‘Project Sashakt’ is awaited, lenders will
Securitisation and Reconstruction of
                                               be able to transfer NPAs onto the books
Financial Assets and Enforcement of
                                               of the AMC immediately, and ARCs will
Security Interest (SARFAESI) Act, 2002,
                                               have the opportunity to revive the asset.
aimed to bring about a system to unlock
                                               Hence, these mechanisms could, in the
value from stressed loans of banks
                                               near future become credible aveneues
and financial institutions are a distinct
                                               for banks to recover dues through sale to
second. ARCs were expected to act as
                                               ARCs and restructuring of debt.
debt aggregators, with the objective to
acquire non-performing loans from the          It must be noted that during the Survey
banking system, and putting them on a          Period, the guidelines of Project Sashakt
path of resolution. However, the actual        were not announced and the banks were
journey of ARCs deviated considerably          at nascent stages of complying with the
from the envisaged path.                       RBI circular dated 12 February 2018.

Figure 2.1 –Preferred resolution mechanism to recover dues

               69%                                             16%                                             15%

        Resolution through IBC                               Sale to ARCs                                Restructuring of debt

Source: PwC Lenders Survey)

                                                                        Decoding the Code: Survey on Twenty One Months of IBC in India 15
Financial creditors: most disadvantageous position under IBC ?
Majority of the respondents are of the
                                               Figure 2.2 – Most disadvantegous class under IBC
view that financial creditors are at the
most disadvanteous position under IBC
given the uncertainty around when a
resolution will ultimately be reached
(refer Figure 2.2).
Considering that the repondents were                     37%                                17%                              13%
lenders themselves and they have
indicated that IBC is their best bet to get
resolution to their stressed portfolio, this
is an interesting outcome, and it appears
that this result is based on the ‘recovery’         Financial creditors               Operational creditors              Employees
achieved on some of the earlier
insolvency cases, where they have had to
take very deep hair cuts. However, it may
be comforting to note that irresepctive of
the results of this survey, banks continue                                    8%                              25%
to believe that the IBC is the preferred
resolution mechanism (Figure 2.1).

                                                                          Statutory Dues               Workmen (labourers)
                                               Source: PwC Lenders Survey

Resolution professionals: can do better
Among our survey respondents, 58%
                                               Figure 2.3 – Appraisal of Resolutional Professionals
felt that resolution professionals need
improvement in managing business
affairs during the CIRP process
(see Figure 2.3).
The role of insolvency resolution
professionals, and their ability to                    27%                        58%                    11%                    4%
handle day-to-day affairs of bankrupt
companies, has come under the spotlight
with the NCLT questioning their
decision-making power recently in some              Well equipped           Need improvement    Can manage temporarily       No response
high-profile insolvency cases. However, it
should be acknowledged that the law is         Source: PwC Lenders Survey
new and is undergoing constant changes,
which makes the role of insolvency
professional quite challenging.

16 PwC
Resolution professionals are the                                                                      challenges they face include lack of                                                                     in India are not empowered by law.
fulcrum of the IBC framework. They                                                                    cooperation from the promoters and                                                                       IBC is a test of the collective resilience
assume various roles, given that                                                                      at times lenders, difficulty in running                                                                  and maturity of creditors, debtors,
they are in charge of managing the                                                                    the company given that quite often                                                                       professionals and regulators combined.
corporate debtor as a going concern                                                                   and particularly at the beginning the                                                                    It is expected that the outlook towards
and are accountable to the CoC and the                                                                operational teams are not supportive                                                                     a resolutional professional may change
adjudicating authority for their actions.                                                             and the regulatory framework in which                                                                    over a period of time.Moreover, the
The responsibility to take the right                                                                  they have to work evolving continuously.                                                                 experience they would have gained over
decision in the interest and welfare of                                                               Unlike certain other countries such                                                                      the last year and a half is expected help
all stakeholders rests with them. The                                                                 as the UK, resolutional professionals                                                                    the profession in the future.

Core sectors expected to continue dominating NCLT
Majority of lenders are of the view                                                                   are likely to evidence maximum number
that Engineering, Procurement and                                                                     of filings before NCLT for insolvency in
Construction (EPC) and power sectors                                                                  the near future (see Figure 2.4).

Figure 2.4 – Sectors likely to evidence significant number of cases before IBC

               48%                                             22%                                                 15%                                              15%

                     EPC                      Thermal Power producers                                   Pharmaceuticals                                             Telecom

Source: PwC Lenders Survey

The cases before the NCLT as on May 2018 are dominated by two sectors—metals
and EPC (see Figure 2.5).

Figure 2.5 – Sector –wise snapshot of cases before NCLT as on May 2018 (Amounts in INR ‘000 Cr)

       123             81             61        57           56             43          40              34           28               27            26           26             24             23          23              19          13           11          10        3           1

           154

      63
                                              48                                             50
                                         43                     41
                                    28
                                                     23 27                                                                                                                                  7                          4 19 4 6
                     11 8                                                 11 17 13                     4 2 11 3 12 18 6 9                                        2 4          0 1                  10 2 3                                           1 2      0 0     4 2           0 0

       als           in
                          g           n        CG         ile
                                                               s            s               ia         in
                                                                                                         g
                                                                                                                    at
                                                                                                                        e             rts           er            es          lity          rin
                                                                                                                                                                                                g             ts           n           a            re       in
                                                                                                                                                                                                                                                                 g     al          ne
                                                                                                                                                                                                                                                                                      s
    et            ur             ct
                                    io                  xt                Ga           ed          ad           st               pa              ow           vic          ta            ee             uc            ta
                                                                                                                                                                                                                        tio       ar
                                                                                                                                                                                                                                     m           ca       ail        Co         rli
  M           ac
                 t
                              tru          FM        Te            il &
                                                                                   M             Tr            E            to                 P             r            i             n           ro
                                                                                                                                                                                                       d
                                                                                                                                                                                                                   or           Ph          alt
                                                                                                                                                                                                                                                h        t                    Ai
          uf                                                                    y,                          al                              y/            Se           sp            gi                                                               Re
                       ns                                    ,O            lo
                                                                               g         ale            Re           Au            er
                                                                                                                                        g
                                                                                                                                                   na
                                                                                                                                                      l          Ho             En            er
                                                                                                                                                                                                   P
                                                                                                                                                                                                           ns
                                                                                                                                                                                                               p                       He
      an             Co                                   ls            o              es                          o/                                                                      p              a
   M             &                                    ica            hn             ol                       Au
                                                                                                                t                En           sio                                       Pa             Tr
           fra                                     em           Te
                                                                   c               h                                                        es
                                                                               W                                                       of
         In                                     Ch                                                                                Pr

                                                                                                                                                                                               Revenue                           Debt                           No of companies
(Sorce : Eight Capital Advisory, VCCCircle)

This also raises the relevance of                                                                     promoters are likely to continue to
pre-insolvency schemes such as the                                                                    be a part of the company and could
Samadhan scheme (especially relevant                                                                  well retain a management hold over
for the power sector)—wherein                                                                         the company.

                                                                                                                                                                 Decoding the Code: Survey on Twenty One Months of IBC in India 17
Operational creditors are not welcome
to take decisions
85% of our survey respondents believe             The IBC currently states that the
that major operational creditors                  resolutional professional will give
should not be included in decision                notice of each meeting of the CoC
making (in the form of voting rights)             to operational creditors, or their
in the Committee of Creditors (CoC)               representatives, if the amount of their
(see Figure 2.6).                                 aggregate dues is not less than 10% of
                                                  the debt. It also states that representative
Figure 2.6 - Should major operational creditors   of operational creditors may attend
be included in decision making in the CoC?        meetings of the CoC but will not have
                                                  any voting rights. The NCLT, however, in
                                                  one of the cases, permitted operational
                                                  creditors with debt lower than 10% to
                                                  participate in the CoC.
                                                  As the constituents of our survey
                    15%                           were lenders, it is not surprising to
                                                  find that a majority of them felt that
                                                  operational creditors should not be
                                                  included in decision making in the CoC.
                      Yes
                                                  In the UK, all creditors (except secured
                                                  creditors to the extent of the value of
                                                  their security), including operational
                                                  (trade) creditors, have voting power
                                                  in the CoC, in the ratio of the amount
                                                  outstanding—particularly for the
                    85%                           approval of a resolution plan. However,
                                                  in India, only financial creditors (secured
                                                  or unsecured) can vote in a CoC. The
                                                  opertaional creditors, are eligible for a
                      No                          proportion of the ‘liquidation value due
                                                  to them ’, what they get depends on the
Source: PwC Lenders Survey)                       approved resolution plan.

Expression of Interest (EOI): preferred
method of bidding
The EOI invitation is the most preferred bidding method according to survey
respondents followed by open auction and swiss challenge method (see Figure 2.7).

Figure 2.7 – Preferred bidding method

            62%                              10%                             28%

         EOI invitation              Swiss challenge method               Open auction

(Source: PwC Lenders Survey)

18 PwC
This assumes significance given recent             bidders, including the H1 bidder, to           ‘Swiss Challenge’ method will make the
proceedings related to a cement                    place counter-bids in the second round         insolvency resolution process under the
company, where a bidder offered to                 of bidding. The stressed asset will go to      IBC more transparent. It can potentially
increase its bid after another bidder was          the highest bidder in the second round.        also help banks realise more value
declared as a top bidder.                          If no other bidder is able to better the       from the bidding process and possibly
                                                   H1 bid, the top bidder in the first round      reduce litigation.
Under the ‘Swiss Challenge’ method,
                                                   is declared the successful bidder. A
the highest (H1) bid in the first round
                                                   few lenders are of the opinion that the
of bidding becomes the base price for

Bidders should be                                  No requirement for                             A ray of hope
allowed to improve                                 differential framework                         The IBC has become the preferred route
                                                                                                  of resolution for creditors. Also, the
their offers                                       for small companies                            rate at which applications for resolution
Interestingly, survey results indicate that        According to our survey results, 54% of        are either being accepted or rejected is
54% of respondents are of the view that            respondents feel that there should not be      commendable as it encourages more
the law should not restrict bidders from           a differentiated framework for Small and       and more creditors to take this route for
improving their financial offers (see              Medium Enterprise (SMEs) or Micro,             efficient NPA resolution. While the IBC
Figure 2.8).                                       Small and Medium Enterprises (MSMEs)           has provided creditors with a new tool to
                                                   (see Figure 2.9).                              manage their relationship with debtors,
                                                                                                  its impact on improving the future credit
Figure 2.8 - Should the law restrict bidders’      Figure 2.9 - Should there be a                 scenario in India and on avoiding bad
ability to continuously improve their financial    differentiated framework for                   debts going forward is yet untested.
offers till the last bidder remains in the fray?   SMEs or MSMEs?
                                                                                                  Though the RBI circular of February
                                                                                                  12, 2018 and Project Sashakt should be
                                                                                                  enablers for identification of stress at an
                                                                                                  early stage and resolution outside of IBC.
                                                                                                  Given that it is a nascent law the initial
                                                                     46%                          hiccups are anticipated, hopefully it will
                     46%                                                                          evolve over a period of time and provide
                                                                                                  the much needed overhaul to the NPA
                                                                                                  situation in India.

                                                                       Yes
                       Yes

                     54%                                             54%

                                                                       No
                       No

Source: PwC Lenders Survey                         Source: PwC Lenders Survey

The law currently does not curtail                 The key question is that whether one
a bidder from improving his offer.                 code or framework is sufficient to cater
Furthermore, the NCLAT in one of the               to all size of businesses. The issue has
cases has directed the CoC to consider             been addressed through an amendment
upward revised offers.                             made post the launch of the survey.
                                                   According to a recent amendment,
IBC is a fairly new legislation, and it has
                                                   MSME promoters will be allowed to
been continually evolving. However,
                                                   bid for their companies should they be
stakeholders should not lose the
                                                   put through the Corporate Insolvency
sight of its spirit and purpose. Value
                                                   Process (CIR) process, provided they
maximisation is a key driver, but at
                                                   are not willfil defaulters. Hence, an
the same time it is important that the
                                                   exception has been made.
resolution takes place in a timely manner
and the asset quality does not deteriorate         The survey reponses, in this case, are not
over a prolonged resolution process.               in consonance with the amendment.

                                                                              Decoding the Code: Survey on Twenty One Months of IBC in India 19
The Legal Tangle
IBC has been plagued by a number of legal issues
There are seven key issues of relevance here:

 Sr. No   Area              Reason for lack of clarity                                             Current status

 1        Right of          • In the case of insolvency proceedings against the Jaypee             • The Insolvency and Bankruptcy Code
          customer or         Group, the amount owed by the Group to the home buyers                 (Amendment) Ordinance, 2018 (‘Ordinance’)
          depositor as        was much higher than those to financial creditors.                     recognises the ‘home-buyer’ as a financial
          creditor                                                                                   creditor for initiating the corporate insolvency
                            • However, in the resolution plan, the financial creditors were          resolution process against fraudulent or defaulting
                              given 1.6 times higher weightage than customers.                       real estate developers.
                            • The Code allows only a financial creditor to initiate corporate      • Therefore, the Ordinance now enables home
                              insolvency resolution proceedings.                                     buyers to represent themselves in the Committee
                            • Although the term ‘financial creditors’ is defined under the           of Creditors—giving them a fair chance of
                              Code, there is not much clarity about the inclusion of ‘home-          receiving repayment of their investments.
                              buyer’ in the definition.

 2        Nexus or          • Section 29A of the Code provides for persons ineligible to be        • The Ordinance has now defined ‘relatives’ and
          related party’s     resolution applicants.                                                 ‘related party’ in relation to individuals who have
          right to bid                                                                               run a stressed business, covering relatives leading
                            • Earlier, it defined ‘related party’ only in the context of a           up to fourth generation of an individual.
                              corporate. It was silent on related party and relatives in
                              context of individual or promoters, giving rise to ambiguities       • This widens the scope of persons who will be
                              and litigations.                                                       barred from bidding for stressed business.
                            • Furthermore, as a result of section 29A, even genuine                • Furthermore, the Ordinance has also made a
                              investors (e.g., stressed asset funds) were getting                    carve out for pure play financial entities, which are
                              disqualified from bidding.                                             not related to the Corporate Debtor.

 3        Regulatory        • The definition of operational creditor and financial creditor        • The Insolvency Law Committee* in its
          dues - which        does not make it very clear whether payments to be made to             recommendations has stated that regulatory dues
          class of            statutory authorities would fall under which bucket.                   need not form part of operational debt. At the
          creditor                                                                                   same time, it may be difficult to treat the same as
                                                                                                     financial debt.
                                                                                                   • Hence, the same remains unclear to that extent.

 4        Decision          • Decisions taken by the CoC could be taken only if 75% of             • The Ordinance prescribes that decisions
          making              the CoC voted in favour.                                               of the CoC will be passed if 66% of the
          required by                                                                                CoC vote in favour.
          lenders - is      • Although the provision was intentioned to ensure
          75% too high        acceptability of action, in effect, it led to a lot of logjam over
                              approval of resolution plans and also in routine decisions.

 5        Application of    • Application of the Limitation Act to the proceedings under           • The Ordinance has inserted section 238A in the
          Limitation Act      the Code was not mentioned in the Code.                                Code whereby it has been clarified that provisions
          on insolvency                                                                              of the Limitation Act should apply to proceedings
          proceedings       • This led to a lot of hardship in enforcing one’s debt—if the           under the NCLT, NCLAT, DRT or DRAT, as the
                              debts have become time barred.                                         case may be.

 6        Liability of      • In the absence of a specific provision to the contrary, the          • The Ordinance has amended subsection 3 of
          guarantor           guarantors of the corporate debtor sought to seek benefit of           section 14 of the Code by specifically stating
                              the moratorium applied under section 14 of the Code when               that the moratorium under section 14(1) of the
                              the insolvency petition was admitted against the corporate             Code will not apply to guarantors of the corporate
                              debtor.                                                                debtor.

 7        Non alignment     • Provisions of SEBI laws, Income Tax laws, Companies Act,             • By way of various amendments, the Government
          of other            2013 were not in consonance with the Code.                             is trying to align other laws with the Code.
          regulatory
          laws with the     • Hence, there were ambiguities on how a transaction will
          Code                be treated under the tax laws (for instance change in
                              shareholding beyond 49%), SEBI laws (trigger an open offer
                              on acquisition of a listed company admitted under the Code)
                              etc.

*Report of the Insolvency Law Committee dated March 2018

20 PwC
Legal wrangles persist
PwC also conducted structured                  India (Insolvency Resolution Process for
discussions and a survey with law              Corporate Persons) (Third Amendment)
firms—to collate legal and regulatory          Regulations, 2018 (‘Rules’), has
perspectives and issues relevant to IBC.       addressed both these issues by providing
                                               that home buyers will be treated as
Two of the key outstanding issues
                                               financial creditors to initiate a corporate
were the treatment of home buyers
                                               insolvency resolution process, give
and related party rights to bid. The
                                               relaxations to certain classes of related
Ordinance dated 6 June 2018, read with
                                               parties and pure play financial entities.
the Insolvency and Bankruptcy Board of

There are, however, several issues that are still outstanding, such as:
1. Out of court settlements                    2. High value bids submitted after            3. Conditions precedent
                                                   the deadline
In the case of Binani Cement Limited                                                          For acquisitions or the takeover of any
(BCL), a consortium led by the Dalmia          In the case of Bhushan Power and Steel         business, a host of regulatory approvals
Bharat Group, emerged as the highest           Limited, Liberty House submitted the           are required. While the Code provides
bidder. UltraTech Cement Limited               bid after the deadline for submission          that the Resolution Applicant will
entered an agreement with Binani               as per Process Document had expired.           acquire control over the corporate debtor
Industries Limited (BIL), the parent of        The CoC rejected the bid. However,             on approval of the Resolution Plan, other
BCL, wherein UltraTech agreed to buy           Liberty House then challenged the CoC’s        regulatory laws prevalent in India— such
BIL’s 98.43% in BCL in an event that           decision to reject its bid on the grounds      as SEBI laws or Competition Act, 2002—
insolvency proceedings were terminated.        of late submission. Later, the NCLT asked      were not aligned with the provisions
Such an agreement between Ultratech            lenders to consider Liberty House’s bid,       of the Code. As a result of this ‘non-
and the promoters of BCL raised                stating bids could only be rejected on         alignment’ between the Code and other
following questions on the sanctity            substantive grounds, and not due to            laws, Resolution Plans submitted to
of the Code:                                   internal timelines. Tata Steel, seen as        the NCLT contained certain ‘conditions
                                               the highest bidder for the Resolution,         precedent’ such as potential waivers of
• Can an application once admitted
                                               then moved the NCLAT challenging the           stamp duty, approval of the Competition
  under the Code be terminated?
                                               NCLT’s order. The matter is on-going and       Commission of India and approvals of
• If yes, then who has the power               the NCLAT has allowed all 3 bidders, i.e.,     other specific sector regulators.
  to terminate the proceedings                 Tata Steel, Liberty House and JSW Steel
                                                                                              While some resolution cases have
  under the Code?                              to file revised offers.
                                                                                              accepted such conditions precedent,
Strong objections were raised by both          While the recent Ordinance resolved            others have not. A key question that
parties, and accordingly the Government        various issues, this specific issue            remains—in an event where a resolution
took adequate steps and amended                has escaped the attention of the               plan is approved by the NCLT, with
the Code by way of the Ordinance.              Government. There is still no clarity on       conditions precedent, and subsequently
Section 12A of the Code provides that          whether such late bids can be submitted        these conditions precedent cannot
the adjudicating authority (that is,           or not. This leads to several outstanding      be fulfilled, what happens to such a
NCLT) may allow the withdrawal of an           questions, such as:                            resolution plan? While till date there has
application admitted under Section 7 or                                                       been no such case, it will be better for
                                               • What will be the long-term impact if
Section 9 or Section 10 (i.e., initiation of                                                  the Government to clarify on this point
                                                 bids are allowed to be submitted after
corporate insolvency resolution process                                                       to avoid litigation in future.
                                                 the deadline?
by financial creditor, operational creditor
                                                                                              PwC’s survey findings indicate that
and corporate applicant, respectively)         • Is bidding for companies under the
                                                                                              out-of-court settlements and evaluation
of the Code, on an application made              Code soon going to be based on the
                                                                                              of higher bids submitted after the
by the applicant, with the approval of           Swiss Challenge method?
                                                                                              deadline were major obstructions
90% voting share of the Committee of
                                                                                              in the implementation of the Code.
Creditors, in such manner as may be
                                                                                              Furthermore, exemptions and waivers
prescribed. Furthermore, an application
                                                                                              sought in the resolution plan are
for withdrawal can be submitted only
                                                                                              generally not being given, and the
before the issue of an invitation for
                                                                                              resolution applicant or corporate debtor
expression of interest. This is a welcome
                                                                                              is being subject to undue hardships.
move, which will help facilitate out-of-
                                                                                              Moreover, in some cases, the NCLT is
court settlements for several disputes.
                                                                                              directing modifications to be made in the
                                                                                              relief section of the resolution plan, and
                                                                                              there are instances where the NCLT is
                                                                                              going into the commercial and business
                                                                                              decisions in resolution plans. This may
                                                                                              lead to further hardship for potential
                                                                                              bidders, thereby, discouraging them
                                                                                              from bidding in the first place.

                                                                          Decoding the Code: Survey on Twenty One Months of IBC in India 21
You can also read