Is the government strategically manoeuvring the IBC?

The time taken to resolve cases under Insolvency and Bankruptcy Code (IBC) is gradually increasing. In 2017-18 the average time for resolution was 230 days. This has increased to 679 days for current financial year to September 2022. Moreover, 64% of the insolvency cases are ongoing for over 270 days. As a result, the perception is that the IBC is losing its sheen, however, the government seems to be no hurry to streamline the code. Responding to a question in the last parliament session, it was clarified that currently there was no proposal under consideration to reduce procedural delays of IBC. Similarly, the government ruled out any fast-track process to resolve real estate companies. Nevertheless, the extended arms of government seem to be playing an active role in resolving stressed assets.
The first whiff of possible government intervention arose when an ex-Governor of Reserve Bank of India (RBI), Urjit Patel, wrote of the same in 2020. However, for the common man this came to fore in the Union Budget of 2021, when National Asset Reconstruction Company Limited (NARCL) commonly referred as Bad Bank was proposed. Strangely, post the announcement of Bad Bank, the National Company Law Tribunal (NCLT) benches have been staffed sub-optimally. Fewer judges have led to delays, which in turn has resulted in banks losing interest in the IBC, instead gravitating towards NARCL.

Additionally, RBI in October '22 notified regulatory framework for Asset Reconstruction Companies (ARCs). The framework allows ARCs to settle dues with borrowers after the proposal is examined by an Independent Advisory Committee and Board of Directors. Interestingly, the requirement of compliance with Section 29A of IBC is not stipulated for settling with the borrower. The Memorandum of Association of NARCL too allows settlement of dues of borrowers. One will have to wait to see whether some interesting settlements are on the horizon.

One of the earliest interventions of the Centre, for resolution, was the creation of SWAMIH Investment Fund for providing last mile funding of affordable and middle-income stalled housing projects, including those projects that had been declared as non-performing assets or are pending insolvency proceedings before the NCLT.

The case of stressed power assets buttresses the argument. The Parliamentary Standing Committee on Energy, in 2018, had identified 34 stressed projects with a capacity of 38,870MW. Currently, 10 projects of 9,230MW capacity are under liquidation. Consequently, Jhabua Power Plant was recently taken over by NTPC in a joint venture with other secured lenders, wherein Power Finance Corporation (PFC) was the largest lender. Similarly, for Lanco Amarkantak, a consortium of PFC, REC, SJVN and Damodar Valley Corporation may outbid a large conglomerate like Adani — a conglomerate that helped resolve five projects with a capacity of 7,670MW.

Also, PFC and REC Board, in August ’22, approved creation of a 50:50 Power Asset Management Company, to take over, operate, maintain, and construct, stressed power projects. Outside of IBC too public sector companies are active in restructuring stressed power assets. For example, Suzlon had two rounds of restructuring in the recent past, the second of which was a refinancing of loans of SBI led consortium by REC and Indian Renewable Energy Development Agency Limited.

Similarly, Central Government in consultation with the financial sector regulators notifies financial service providers for the purpose of insolvency proceedings i.e., currently, only by a reference of RBI. Though, not an optimum solution, nevertheless, the invisible hand is at work to resolve NBFCs subjected to IBC i.e., DHFL has been successfully resolved whereas SREI and Reliance Capital are amidst insolvency. One of the bidders for SREI is NARCL.

This brings us to another arm of government that may end up playing a role in future i.e., The National Bank for Financing Infrastructure and Development (NBFID). Of the many functions of NBFID, one is to take over or refinance existing loans extended by a lender for infrastructure projects. Another function is to acquire an undertaking or institution, the principal object of which is the promotion or development of infrastructure financing for projects. The aforesaid reads like the object clause of SREI! As there is no bar on NBFID to take over or refinance existing stressed loans, it may venture in this arena.

Finally, IBBI has recently allowed a juristic person like an Insolvency Professional Entity (IPE) to act as an insolvency professional (IP). Earlier, only individuals could act as IPs. Thus, it is theoretically possible for a subsidiary of a public sector enterprise to function as an IP; 49% stake with the public sector enterprise and 51% with other individual IPs.

The question is whether central planning is back in vogue, or we are amidst a synchronicity of coincidences?


The authhor is INSOL Fellow and Restructuring Advisor