Wednesday, December 28, 2022

Extend the small-business bankruptcy concept to large enterprises as well: RBI

Expand small business insolvency model to big corporations too: RBI


  MUMBAI: Large borrowers should be included in the "pre-packaged" insolvency resolution process, according to the Reserve Bank of India (RBI). Before going to the insolvency court, the pre-packaged procedure requires a majority of creditors to accept a deal and focuses primarily on resolution. In addition, the central bank has stated that corporations in India require a framework for group resolution in order to enhance the effectiveness of the Insolvency and Bankruptcy Code (IBC).

The RBI has remained steadfast in its support of the IBC as a procedure for addressing defaults in the corporate sector, despite criticism that the insolvency framework is yielding lower returns. The "haircut," or the comparison of realised value with admitted claims, is not a reasonable indicator of the resolution process, according to the RBI, as significant value destruction has already occurred in these assets. Instead, the IBC has helped lenders recover close to 201 percent of the liquidation value up until September 2022, according to the central bank.

However, the RBI has acknowledged that the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi), 2002 and debt recovery tribunals (DRTs) continue to be as effective as the IBC.

A mechanism for insolvency resolution in which debtors and creditors agree on the next steps is referred to as the "pre-packaged process." When 66% of the leasers acknowledge a goal plan, the gatherings approach the bankruptcy court for its execution. The pre-package insolvency resolution for micro, small, and medium-sized businesses (MSMEs) and other small businesses was introduced by the government. As it turns out, while the RBI has suggested the pre-bundle measure, just two cases have been conceded through this course since April 2021 and it is yet to get forward momentum.

The fact that very few cases can be resolved within the legally mandated timelines is one of the main obstacles in the insolvency process. Even though IL&FS Group, Videocon Group, and Reliance Capital have all experienced group-level insolvencies, there is no formal framework in place for group resolution.

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