Think Tank
Insolvency and Bankruptcy Code
The rollout of the Insolvency and Bankruptcy Code (IBC) in 2016 brought a gust of optimism for lenders. Five years later, laments about low recovery rates, high liquidation percentages and lengthy delays are common. The latest data indicate that, as of June 2021, the recovery rate in 396 cases where a resolution plan was approved was just 33%. Out of 2,850 closed cases, 47% went into liquidation. Further, 75% of ongoing cases have crossed the 270-day limit set by the IBC for completing the resolution process. Proponents of the new law, however, continue to believe that things will get better with time. What are some urgent steps that must be taken to strengthen the process? What are some pivotal milestones expected over the next few years? At a recent webinar of the India CFO Forum, we invited V Ranganathan, who serves as an Independent Director in four public companies, and who has over 40 years of variegated experience in corporate governance, to provide a view on these issues.
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Conceptually, the IBC was not radically new, but an evolution of existing mechanisms |
IBC: Far from radical… Much before the IBC came into existence, the Companies Act provided ways to resolve corporate insolvencies. In fact, as far back as the 1940s, the courts were ruling on cases related to debt repayment/insolvency. At a conceptual level, therefore, the IBC was not entirely ‘new’, but rather, a more evolved mechanism than what came before it. By design, it takes into consideration previous learnings and pitfalls in the conflict-resolution system, and it is a more ‘shielded’ apparatus. Moreover, running in parallel to the IBC, creditors have continued access to the SARFAESI and DRT provisions. The IBC encompasses all of the attributes of existing debt-resolution mechanisms, and more. Additionally, the legislation around it has continued to evolve in the last 5 years, ensuring that it is both dynamic and sensitive to changing circumstances. For these reasons, it is not incorrect to expect the IBC to eventually supersede all of the older mechanisms. |
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Shifting the steering wheel from debtor to creditor |
…but much needed Over several decades, India accrued Asia’s highest levels of non-performing assets (NPAs). By 2014, the debt-equity ratio at some Indian companies was as high as 28, and creditors were always at the mercy of debtors to get their money back. This sorry state of affairs created the necessary momentum to push for a new resolution mechanism. When it was launched, the IBC represented a major cultural change, centred around a ‘creditor in control’ approach. Tellingly, the Supreme Court has dealt expeditiously with all cases arriving at its door under the provisions of the IBC. |
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Early successes |
Under the IBC, the recovery rate for NPAs rose to 45.5% in 2019-20 compared to 6.2%, 4.1% and 26.7% rates under Lok Adalat, DRT and SARFAESI, respectively. The average time to achieve resolution under the code is 441 days, and to attain liquidation, 328 days. These timelines are much shorter than under earlier mechanisms. Before its implementation, NPAs were being written-off at a snail’s pace, posing a major risk to the financial sector. However, a GNPA write-off of 11.7% in 2010 was raised to 20.5% in 2021 by the Code. |
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There have been issues with the Code… |
Course-correcting, and the way forward No law is perfect, and the IBC has had its fair share of lapses:
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…which recent amendments have sought to correct |
Some of these issues triggered changes to the code that came into effect in September 2021:
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On the whole, a big step in the right direction |
On net, the IBC has made the debt-resolution system more efficient and better-managed. It has, for instance:
While there have been some lapses in its implementation, the benefits offered by a timely and efficient debt-resolution mechanism far outweigh its costs. All indications, both from the financial authorities and from the courts, suggest a positive outlook for the Code, going forward. |
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Many businesses have been on a quest to become data-driven for the better part of the last decade, and for good reason. The end-goal might be to gain competitive advantage, build operational efficiencies and effectiveness, or scale up. Alternatively, the aim might be to become more agile, develop the ability to take more informed decisions, such as by identifying and leveraging business opportunities (or risks) sooner. For still others, it may be about driving innovation and value-creation or optimising business execution. However, becoming data-driven is not an easy task. Companies that succeed in this domain have one thing in common: their CEOs are actively engaged in data initiatives, drive digital transformation, encourage employees to embrace advanced analytics, and oversee strong governance processes. A fine example of such a company is Aditya Birla Health Insurance Company (ABHICL), led by its exemplary CFO-turned-CEO, Mayank Bathwal.
As companies transform for the digital age, Finance teams are under significant pressure to add value and take on more of a business partnering role. The demands put on CFOs are only expected to increase, requiring them to be deeply involved in stakeholder engagement, as well as to proactively identify and manage new commercial opportunities. To be successful in their roles, CFOs therefore need to be skilled in much more than just financial management, and demonstrate capabilities in communication, business acumen and in terms of leading a strategic vision.
THINK TANK
The 2022 Union Budget will be pivotal in defining the way forward for the Indian economy amidst a continuing pandemic. Before the recent surge in Covid cases, the economy was getting back on track: GDP growth in the September quarter was 8.4% and most high-frequency indicators were at or above pre-pandemic levels. However, economic activity and business sentiment may have taken a short-term hit due to Omicron, and there could be future waves to contend with. Given these circumstances, what were the government’s priorities in this Budget? Where will it get the resources to spend? To decode these issues and take stock of India’s economic trajectory, we invited Ananth Narayan, Associate Professor of Finance at SP Jain Institute of Management and Research, to share his views at a recent joint session of the India CEO and India CFO Forums.
In November 2021, SEBI notified several important changes to the regulatory regime around related party transactions (RPTs). These include: broadening the definition of ‘related party’ to include entities belonging to the promoter group; expanding the list of RPTs that require approval from the Audit Committee; and tweaking the materiality thresholds. At a recent session of the India CFO Forum, Bharat Vasani, Partner – General Corporate, Media and Entertainment at Cyril Amarchand Mangaldas, provided a bird’s-eye view of these amendments and their implications for businesses.
Social media (SM) has become an integral part of our lives, and has in many ways redefined fundamental paradigms of speech, expression, identity, privacy, security and even how business is conducted. It has emerged as a platform for societal influence, moving beyond its traditional role as a communication tool. At the same time, there is a growing backlash against social media giants from regulators, activists, the traditional media and other sections of society. At a recent joint session of IMA India’s CEO and CMO Forums, Santosh Desai, Managing Director & CEO of Futurebrands, a brand and consumer consultancy company, spoke of the changing role of social media in society and the potential implications for business.