This is the year of landmark reforms: GST and the Bankruptcy Code (Code). While the former has been subject to much discussion and debate, the latter is just beginning to be scrutinized. Both are expected to get implemented around the same time and both have a high potential to change the way we do business — if implemented with the intent with which they have been drafted.
Since 2014, the Reserve Bank of India (RBI) has cracked down significantly on the bad loans situation accumulated in the banking system over time through an AQR process, bringing to light the seriousness of the problem. This has been supplemented by very progressive and constructive initiatives such as the Joint Lenders Forum (JLF), Strategic Debt Restructuring (SDR) — with and without change in control — and S4A. These frameworks, though unable to address all situations, are a step forward towards a resolution culture. Default resolution is and will always remain unique to each situation. The Code, from that respect, is timely as it focusses on a turnaround plan with a deadline, which, if not met, results in liquidation. This forces creditors to act in unis on or face consequences (one of the significant drawbacks of the earlier schemes) and avoids arbitrages available due to multiple regulations.
While the Code is hailed as one of the best, the devil lies in the detail. Timely action by all stakeholders and dealing with owner-managers would underpin the success of the Code.
No timely action by lenders is considered appropriate in an Indian environment, which destroys the overall value for most creditors. The law has provisions for such situations, but there are enough and more issues to deal with, including creditors taking quick decisions during the moratorium period, appeals to NCLT being resolved amicably and NCLT relying more on the IP to run the process for quicker disposition. The law is more an operational turnaround than a legal battleground. If that is understood by all the participants, it would solve problems than create them.
Dealing with owner-managers
The presence of owner-managers is a situation unique to developing economies such as India. In recent times, though, we have seen creditors take significant action to work with promoters in the best interest of the enterprise. The firmness of creditors supported by good execution can result in a win-win situation for enterprises and creditors. The Code further empowers this action, and there has been an increasing awareness among ownermanagers to cooperate in the process.
While there is a long way to go in terms of filling all the holes, the Code is one of the best we have seen given our circumstances, and I am sure the law will amend itself as we gain maturity in behavior and experience unique situations that can be generalized. A good start with the right intent and a good infrastructure is half the battle won.
Partner & Head - Financial Services, Restructuring & Turnaround Services EY
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