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Lack of transparency plagues India's new insolvency and bankruptcy regime -Nitin Sethi
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A year after its launch, the new process that handles the recovery of crores of rupees of unpaid corporate debt is shrouded in opaqueness.

India’s new insolvency and bankruptcy regime has been functioning for a year without any disclosure norms or mandatory transparency regulations. In the first year of its application, the regime is already dealing with more than 450 cases that add up to thousands of crores of rupees of unsettled debts. Neither the details of the cases being dealt with nor the deliberations over the case by creditors behind closed doors nor the final decision of either resolution or liquidation are being put out in public.

This has led to rumours and controversies about the decisions being taken by the tribunals set up under the regime, as well as the deep discounts banks and other financial lenders have had to take to settle their debts.

The new insolvency regime was set in place in May 2016 with the passing of the Insolvency and Banking Code by Parliament. The law set in place a time-bound mechanism supervised and adjudicated by the National Company Law Tribunal and the National Company Law Appellate Tribunal to resolve cases of unpaid debts by companies. It set up the Insolvency and Bankruptcy Board to set the ground rules for the resolution of bad debts.

Companies with unpaid debts have three options once a creditor triggers a case against them under the insolvency process. They can mutually settle the debt with the applicant within 14 days of an application being filed. But once the application is admitted, the company has to face all its creditors who mutually agree to a resolution plan that can keep the company running and repay its debts. This is called the resolution process for which other entities can make bids to buy stakes in the company under scrutiny. If in 270 days a resolution plan cannot be mutually drawn up, the indebted company is liquidated, and whatever money that is recovered from selling it is then distributed to its creditors. In either of the cases the creditors have to take a hit (called a haircut in the financial world’s parlance) and recover only part of their dues.

But researchers and experts monitoring the tribunals and the insolvency process have found it to be working under a shroud of opaqueness – information regarding most of the steps of the process is not put out, even after the process has been completed.

“At the moment we do not come to know how one resolution plan has been chosen over the other, or how creditors decided to go for liquidation instead of other alternatives,” said Bhargavi Zaveri, senior research associate at the Indira Gandhi Institute of Development Research. “We do not know who has proposed resolution alternatives, what is the recovery rate or how is it computed. We have to rely on media articles, or glean through the fineprint of orders of the tribunals and dig whatever information we can from them. Those too are not standardised and often do not reveal the relevant information.”

No transparency, no trust?

The lack of transparency is disquieting for three key reasons. The decisions on how to handle insolvency or bankruptcy of an indebted company are taken by only financial creditors – banks and other financial institutions who have given loans to the company. The other creditors – known as operational creditors – can trigger the insolvency process but are not seated at the negotiations with the debtors when it is decided how the companies shall repay their debts in the future or be sold as bankrupt to recover their leftover value.

Second, shareholders of listed companies, employees of the debtors and other stakeholders under the insolvency process also do not come to know of how creditors have taken decisions that impact their investments and future relations with the company.

Zaveri pointed to another important need for transparency. “We need to see data on how a law is performing at an aggregate level,” Zaveri said. “We cannot be making changes to law on a one-off case that maybe an outlier. We need to see trends. For that transparency from the courts and from the resolution process is absolutely essential. We can debate the level of transparency depending on the commercial considerations but if we all agree on the principle then those debates get easier.”

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