Center to cut the wings of banks amid alert on deep haircuts in insolvency

The Ministry of Commercial Affairs (MCA) will soon begin consultations with the Reserve Bank of India (RBI) and the Department of Financial Services for the proposed code of conduct for the creditors committee in insolvency resolution cases.

On September 24, the Insolvency and Bankruptcy Board of India (IBBI) approved a code of conduct for banks and financial institutions, which form the Creditors Committee (CoC) in insolvency matters, after a coup by the National Court of Corporate Law as well as as the Standing Parliamentary Committee on Finance on recent cases of significant haircuts taken by COCs and decisions in violation of the provisions of the Insolvency and Bankruptcy Code, 2016.

“The stakeholder consultation will begin when the IBBI sends us the approved code of conduct. We will begin consultations with the RBI and the Department of Financial Services, as any regulations for banks must also be discussed with the central bank, ”a senior MCA source said. Fortune India.

The government will notify the code of conduct for lenders under the IBBI regulations or make an amendment to the IBC law.

In August, the Parliamentary Standing Committee on Finance, headed by former Minister of State (Finance) Jayant Sinha, made a strong remark on the drastic cuts taken by the Creditors Committee and called for a code allowing creditors to “Define and circumscribe their decisions because they have more important implications for the effectiveness of the IBC”.

One of the examples of lenders suffering a steep haircut is the Videocon insolvency case in which the creditors committee headed by the State Bank of India agreed to a 95.85% haircut while approving the resolution plan. of 2,962 crores offered by the Vedanta group company, Twin Star. Technologies against the total admitted claim of 64,838 crore. The NCLT’s Mumbai bench, while approving the plan on June 8, had noticed whether the banks were getting a haircut or a full shave.

Now SBI has approached the adjudicating authority with a plea for a new auction in the deal as the value of Twin Star’s bid for Videocon Industries is too low.

Likewise, the NCLT’s Chennai Bench last month ordered the liquidation of Siva Industries, rejecting the settlement plea of ​​lenders accepting 328.21 crore against admitted claims of ₹ 4,863.87 crore (a haircut of 93 , 5%). The bench said it would rather follow its judicial wisdom than the commercial wisdom of the creditors committee.

According to experts, a set of simple guidelines to regulate the role of the creditors committee will only work if there is legal support to enforce the provisions.

“To say that there will be a code of conduct across the IBC is an inadequacy, these two cannot be reconciled. The functions of the CoC can be changed in the IBC,” said Shardul Shroff, chairman of the IBC. CII working group on IBC, during a webinar on five years of IBC law in August.

“Across the entire insolvency ecosystem, every settlor, whether the insolvency practitioner, the IBBI or the appraisers, is all guided by a set of statutory regulations. It is only the creditors’ committee that is not bound by any regulations, ”said Sandeep Kr. Bhatt, Director, Shrea Insolvency Professionals Pvt. Ltd., said Fortune India. “The proposed code is just a set of guiding principles. The need of the hour is to define the deliverable of the CoC in the context of insolvency under RBI law. The IBBI has no authority over the banks.

It can be noted that during the five years of existence of the insolvency law, out of the 400 major resolution cases, the recovery was of the order of 2.5 lakh crore, with a discount of 60%. . Officials, meanwhile, are quick to point out that the value recovered in major resolution cases is nearly 180% of the debtors’ liquidation value.

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