With Insolvency and Bankruptcy Code 2016 in place and Banking Regulation (Amendment) Act 2017 notified, there is a spike in cases at NCLT. Will this lead to effective management and resolution of the problems of stressed assets and NPAs?
In India these days insolvency and debt restructuring proceedings are raining on the regulators, so to speak. The National Company Law Tribunal (NCLT) is flush with cases hearing petitions against loan defaulting companies. At present it is hearing about 200 odd bankruptcy cases which is soon expected to increase to about 25, 000. However, the Chairman of the Insolvency and Bankruptcy Board of India MS Sahoo told media that the NCLT would not be hit with a tsunami of cases, as only large defaults will be handed to it.
After the amendment in the Banking Regulation Act 1954 were made by the government, the Reserve Bank of India (RBI) in June asked Indian banks to move NCLT to start insolvency and bankruptcy proceedings against 12 large NPA accounts that defaulted on loan repayments to their lenders. These included the accounts of companies such as Bhushan Steel Ltd, Electrosteel Steels Ltd, Lanco Infratech Ltd, IVRCL, Moser Baer India Alok Industries Ltd, Jyoti Structures Ltd, etc.
The newly created Internal Advisory Committee (IAC) of the RBI identified 12 defaulters with ` 5,000 crore of nonperforming assets each for insolvency proceedings under Insolvency and Bankruptcy Code 2016 (IBC). They all constituted close to ` 175,000 crore of NPAs.
The RBI said, “The IAC noted that under the recommended criterion, 12 accounts adding up to about 25 per cent of the current gross NPAs of the banking system would qualify for immediate reference under IBC.”
Later on, in August this year, the Central bank again sent commercial banks a second list of at least 26 defaulters with which it wanted the banks to start the process of debt resolution before initiating bankruptcy proceedings. According to some sources, the list has names of 35-40 companies which may have defaulted in loan repayments.
In May 2017, concerned over increasing number of companies not repaying loans, the Supreme Court said that the defaulters must be sternly dealt with and strict action taken against them.
In a case against Maharaji Educational Trust, which runs several medical colleges, dental college and hospitals, the Supreme Court strongly criticized them for not repaying Rs 480 crore to Housing and Urban Development Corporation Limited (HUDCO).
The bench of Justices Arun Mishra and S Abdul Nazeer said, “The increase of nonperforming assets in banks is one of the offshoots of murky deals. It is shocking that despite having means, earning profits, they are not interested in making payment. Time has come when they have to be dealt with sternly and with an iron hand so as to make them pay public dues.”
The NPAs and stressed assets are eyesore of the banks. Indian banks in the recent years earned bad reputation for creating NPAs. They have piled up NPAs of about 8 lakh crores. Talking about how to resolve bank’s distressed assets, Dr Viral V Acharya, Deputy Governor, Reserve Bank of India, in speech in Feb 2017, said, “Since the RBI initiated the Asset Quality Review of banks in the second half of 2015, it appears that possibly up to a sixth of public sector banks’ gross advances are stressed (nonperforming, restructured or written-off), and a significant majority of these are in fact non-performing assets (NPAs). For banks in the worst shape, the share of assets under stress has approached or exceeded 20%. This estimate of stressed assets has doubled from 2013 in terms of what had been recognized by banks. The doubling of stressed assets is the case also for private sector banks, but their ratio of stressed assets to gross advances is far lower and their capitalization levels far greater.”
In 2016, the government notified the Insolvency and Bankruptcy Code, 2016 (IBC) which consolidated all insolvency laws in India into one comprehensive code. Before the Code came in place, the resolution process in India took years to complete. With the Bankruptcy Code in place along with a well-functioning NCLT, the problems of stressed assets and NPAs are expected to be resolved and managed within the time frame suggested in the Code.
Talking about insolvency, Sahoo says, “Failure usually manifests as default in repayment obligations, though there can be occasions when a firm may default without failure and vice versa. Default is a state of insolvency. The failure and consequent insolvency needs to be prevented. Where prevention is not possible, it needs to be resolved.”
According to Arun Jaitley, Finance Minister, stressed assets in the banking system, or non-performing assets have reached unacceptably high levels and hence, urgent measures are required for their speedy resolution to improve the financial health of banking companies for proper economic growth of the country.
Therefore, the government thought it necessary to make provisions in the Banking Regulation Act, 1949 for authorising the RBI to issue directions to any banking company or banking companies to effectively use the provisions of the IBC for timely resolution of stressed assets.
The government issued an ordinance in May by amending Sec 35 A of the Banking Regulation Act 1954 and later on brought the Banking Regulation (Amendment) Bill 2017 in the Parliament which was passed by both the houses subsequently.
2. In the Banking Regulation Act, 1949 (hereinafter referred to as the principal Act), after section 35A, the following sections shall be inserted, namely: –
35AA. The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.
Explanation – For the purposes of this section, “default” has the same meaning assigned to it in clause (12) of section 3 of the Insolvency and Bankruptcy Code, 2016.
35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets.
(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise any banking company or banking companies on resolution of stressed assets.
On May 22 2017, RBI announced in a Press Not the steps taken and those to be taken after the promulgation of the Banking Regulation (Amendment) Ordinance, 2017. The Press Note said that the amendments to the Banking Regulation Act 1949, introduced through the Ordinance, and the notification issued thereafter by the Central Government empower RBI to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the IIBC.
The Note also said that it enabled the Reserve Bank to issue directions with respect to stressed assets and specify one or more authorities or committees with such members as the Bank may appoint or approve for appointment to advise banking companies on resolution of stressed assets. The Press Note also issued a directive bringing the changes to the existing regulations on dealing with stressed assets.
Later on, in the Press Note dated June 13 2017, the RBI announced the creation of Internal Advisory Committee (IAC) which held its first meeting on June 12, 2017. The Note made the following announcements:
According to new Act, the RBI, based on the recommendations of the IAC, can issue directions to banks to file for insolvency proceedings under the IBC. Such cases will be accorded priority by the NCLT. Once referred to the NCLT, the resolution of the case will have to be completed within 180 days. However, the Code permits an extension up to 90 days in some cases.
Explaining the concept of timeline, Sahoo writes,” The timeline needs to be seen from three perspectives. First, there is enough incentive for adherence to time line. The stakeholders have the necessary motivation to complete the resolution process early as they stand to gain from the resolution and they would suffer grave consequences of liquidation if they fail to complete the process within the given time. Further, the entire process is under their control, so also implementation of the resolution plan.”
“Second, he writes further,” there are facilitators for quick resolution. There are qualified, competent and empowered professionals, called insolvency professionals, who provide assistance throughout the process. There are provisions for calm period when nobody disturbs the corporate under corporate insolvency resolution process (CIRP) and also interim finance. There would be information utilities which would expeditiously provide relevant information required for CIRP.”
With the enactment of insolvency and bankruptcy law, and the subsequent changes in SARFAESI Act and Debt Recovery Act along with the amendment in the Banking Regulations Act 1954, India is taking on the bull of NPAs and stressed assets by the horns. SARFAESI Act and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) were amended in 2016. All these changes have been able to provide an enabling infrastructure to affectively deal with stressed assets.
Moreover, the government is expected to increase the number of NCLT benches in order to deal with the increase in default cases. Apart from the 12 large accounts that RBI referred to along with another 26 odd cases of big defaulters the NCLT benches at 10 locations are dealing with many other cases of insolvency resolution under the new bankruptcy law. According to a report published in the media till June this year, Mumbai Bench of NCLT had 129 corporate insolvency cases, NCLT Delhi had 58 applications whereas Allahabad bench had 15 insolvency applications. The new bankruptcy law is being used not only by the banks, but also by companies or corporate debtors. With the effective implementation of the timely changes made in the statutes along with a well-functioning NCLT in place, the solution to the problems of NPAs and stressed assets looks on the anvil.
www.grandmasters.in | 8 Years & Counting
www.rcls.in | 8 Years & Counting
www.itlegalsummit.com | 8 Years & Counting
www.bfls.in | 8 Years & Counting
www.maels.in | 8 Years & Counting
www.plcs.co.in | 8 Years & Counting
Copyright © 2020 Lex Witness - India's 1st Magazine on Legal & Corporate Affairs Rights of Admission Reserved
