Insolvency regulator to get more teeth, punitive powers; main map amendments

Commenting on whether the IBBI should be further strengthened, a former central banker said: “There is merit in the argument that the IBBI, being a general regulator like Sebi, should have power over the lenders on insolvency resolution matters.”

The government is considering a proposal to bolster the regulatory prowess of the Insolvency and Bankruptcy Board of India (IBBI) – arguably the least powerful watchdog in the financial sector – to strengthen the mechanism for overseeing the resolution of toxic assets, sources told FE.

This could be part of a series of amendments to the Insolvency and Bankruptcy Code (IBC) that the government has planned to present to Parliament for approval.

However, some experts warn that unless the IBBI is given real power to discipline key stakeholders such as creditors and debtors during the resolution process, the quality of regulation and supervision will not improve. not a lot.

“The IBBI could gain more power to develop the insolvency ecosystem and help ensure rapid resolution of stress in insolvent businesses,” one of the sources said.
Some of the changes to the CIB, which have been in the works for two years, could come soon and others later, he added.

At present, the IBBI only regulates Insolvency Professionals (IPs), Intellectual Property Agencies, Intellectual Property Entities and Information Services, and acts as an authority for professionals of the evaluation. It establishes regulations and guidelines for insolvency resolution and liquidation processes in all formats, in accordance with the law passed by Parliament.

However, it lacks the power to regulate the affairs of the most important stakeholders – creditors and debtors – while a company is going through insolvency resolution. Thus, he is not well equipped to discipline them or take punitive measures to prevent wrongdoing.

While the amendments are still being worked on, arguments for more powers for the IBBI and a deeper review of financial creditor cases that weigh on resolution plans have gained traction after a few cases last year tested the spirit of the IBC. For example, in the case of Siva Industries Holding, the lenders agreed to a one-time settlement by its former promoter, who had only offered 6.5% of the total debt, and filed for withdrawal before the National Company Law. Tribunal (NCLT).

In the case of Videocon, the NCLT pointed out that lenders were taking a nearly 96% discount and said it was surprised that Twin Star Technologies’ offer was very close to the liquidation value of the troubled company, which was supposed to be confidential. Thus, it casts implicit doubt on the integrity of the process.

Commenting on whether the IBBI should be further strengthened, a former central banker said: “There is merit in the argument that the IBBI, being a general regulator like Sebi, should have power over the lenders on insolvency resolution matters.”

Another expert said Sebi has the power to crack a bank that wants to go public if the market regulator detects wrongdoing in its regulatory sphere, even if the bank continues to be regulated by sector watchdog RBI. . “There is no reason why such powers cannot be granted to IBBI in the event of insolvency resolution,” he added.

Under the existing mechanism, the IBBI can take the Special Courts – set up under the provisions of the Companies Act 2013 – against a financial creditor if it suspects wrongdoing on the part of the financial creditor. However, since the regulator lacks adequate investigative prowess, it is not possible for it to prove its case with a solid probe.

Also, unlike Sebi, the IBBI only writes regulations, but it does not have the authority to interpret them first or apply them correctly. The capital markets regulator, on the other hand, can punish the culprits, based on its own interpretation of its regulations and investigation. Of course, these can be challenged by the aggrieved party in the Securities Appellate Tribunal.

In September last year, following outrage over a few cases mentioned above, the IBBI published a professional code of conduct for lenders who form the creditors’ committee, in line with the committee’s recommendation. finance committee, stipulating certain do’s and don’ts for them. However, in the absence of real power, it is unclear how strictly IBBI will enforce it to achieve the desired result.

Last year, the parliamentary finance panel warned that the IBC had strayed from its targets due to a long delay in resolution and massive haircuts for lenders.

Shravan Shetty, managing director of advisory firm Primus Partners, said: “The IBBI should also be empowered to consider innovative resolution options. These include identifying and selling certain valuable assets of a struggling business separately to maximize realization instead of waiting for a single bidder to buy the entire business. In addition, the regulator must have the power to order the liquidation of insolvent companies if no resolution is found within one year.

Some analysts, however, believe that the government’s main objective should now be to ensure rapid resolution of assets and prevent the erosion of value. Misha, Partner at Shardul Amarchand Mangaldas & Co, said the available resources and capacity of NCLTs urgently need to be boosted so that they can operate at their optimum capacity. There is also a need to consider introducing mediation as a means of resolving disputes in the area of ​​insolvency, she said.

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