This law will pave the way for creating a formal insolvency resolution process for businesses, either by liquidation of assets or charting out a sustainable survival mechanism.
Analysts from across the spectrum gave their views.
MR Umarji, Member, Bankruptcy Law Committee said this law will make borrowers think twice before they default on their loans. The Debts Recovery Tribunal and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act which exist now won’t be able to interfere with this law, he said.
The 180-day period during which an insolvency case will be tried unde this law will be a moratorium and no other judiciary can interfere, he said.
About 15-20 National Company Law Tribunals will be set up to hear insolvency cases. The first case can come within a year itself, he said. According to Umarji, the one major change is that insolvency practitioners will be appointed as administrators. Today, there is only one high court official who looks after the winding-up of a company.
Sanjay Nayar, CEO, KKR India, said this law will have a long-term impact. The 180-day moratorium will be respected, he said. The key would be make sure the infrastructure is put in place, and there is capacity to tackle all the cases.
Harsh Pais, Partner at Trilegal also felt this law is good for the long-term.
Rashesh Shah, Chairman and CEO, Edelweiss, said it is a big structural move which has been a work-in-progress for some time.
Rajnish Kumar, MD, SBI, said the necessary infrastructure may not be existent today but will have to be developed.
KC Chakrabarty, former deputy governor of Reserve Bank of India said recovery may not be easy for banks.
Below is the verbatim transcript of the interview of experts from the industry with CNBC-TV18.
Shereen: Well the Bill has already been cleared by Lok Sabha and now the Rajya Sabha hurdle is all set to be passed as well. We have just heard from the government, they are explaining why this is a historic legislation and the fact that the parliamentary panel recommendations which have of course been accepted by the government, in toto, have improved upon the bill. What do you believe will be the immediate impact as far as this legislation is concerned?
Umarji: The immediate impact would be that companies and other borrowers of the banks would be very prompt and will have to start making payments on time. The commitments to pay will have to be honoured.
If they don’t do it and if an insolvency petition can be filed immediately on default, that is the trigger for the insolvency petition so if you commit a default, you are going to be facing an insolvency petition against you and the consequence of that is that once an order for insolvency resolution is past, the insolvency professional has to take possession of all the assets and also takeover the management of the enterprise.
Now therefore if I am owning some business which has good value and I have valuable assets which are owned by me, I would prefer not somebody else coming and taking it over from me. The better course is to make payment, so that I don’t commit a default, so this is going to be the major transformation in the system actually.
Shereen: But let me come back to you because as Sanjay was pointing out and this is what the government has been eluding to is well this does strengthen not just the workmans rights but also strengthen the creditor’s position, but we will also now need to see the government move on amending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) as well as the Debt Recovery Tribunal (DRT) Act. Both now have been referred to a parliamentary panel, so for the bankruptcy code in its entirety to kick in, how crucial will the amendments be to both the DRT bill as well as the SARFAESI Act?
Umarji: There is one provision in the insolvency code it says that once the insolvency resolution process starts for a period of 180 days there is a moratorium, no action can be taken against the enterprise under SARFAESI or under DRT Act, so therefore during that time an effort will be made to verify whether the enterprise is viable, whether can the debt can be restructured and whether an insolvency resolution plan can be approved by the Insolvency Tribunal and if that plan is approved that will become operative, if it is found that no such restructuring plan is possible, the company would be put into liquidation and wound up.
To this extent there is a modification of the right to exercise recovery powers under these two laws will be remaining under moratorium for a period of 180 days, if at the request of the creditor it can be extended up to another 90 days, so for a period 270 days you can’t take any action.
Latha: I have a couple of doubts about the timelines that we are looking at. The bill is passed by the Rajya Sabha. Now 11 more amendments have to be passed to the SARFAESI Act, DRT Act, Companies Act a whole host of them. Until then, no move can happen in terms of appointment of National Company Law Tribunal (NCLTs) etc., so we have to wait for those amendments to come through?
Umarji: NCLT will be basically exercising powers under the bankruptcy code, so NCLTs can be appointed there is no problem in that certain changes in the SARFAESI and the DRT amendment the changes are also for expediting the process.
Latha: No those changes are part of this bankruptcy code itself. They don’t have to be separately done?
Umarji: The schedule to the bankruptcy code itself is providing what amendments are to be done.
Latha: So the legal process is over today?
Umarji: It is over today.
Latha: I am just trying to get a timeline as to when will the first case come to the NCLT. How many company or tribunals have to be appointed? Will it be one in each state or several in some states?
Umarji: Some of the states may be under one jurisdiction and so one NCLT may cover 2-3 states, adjoining states or something. That’s really I am not aware exactly, what’s exactly is the plan for appointing.
Latha: And they would be benches or they would be individuals?
Umarji: No, they would be individuals.
Latha: What is the number of people we are looking at? Accordingly, we are trying to estimate the delay in their appointment. Will it take a year before the first case is heard in the NCLT?
Umarji: I think it is about 15-20 NCLTs being set up immediately and the selection process is on and the appointments are expected to be made shortly, that’s my understanding.
Latha: You think that the first case can come within a year?
Umarji: It could be even shorter than that with the speed at which the work is going on.
Shereen: Just talking about the fine print now, anything that you would like specifically to be dealt with by way of the rules which are yet to be formulated by the government in order to keep the spirit of the bill intact?
Umarji: The major change that is coming in this bill is that insolvency practitioners will be appointed as administrator for the insolvency process.
Today the position is there is one officer of the High Court who is the official liquidator and he does the entire process of winding up of a company. So in his place a private practitioner would be taking over and he will be doing the entire exercise of conducting the insolvency resolution process.
Now with the rules and regulations have to be framed for creating a panel of these insolvency practitioners, then prescribing a code of conduct for them and recognising the agencies to which they belong because a Institute of Chartered Accountants, Institute of Company Secretary, Bar Councils of which the advocates are members.
All of them will also have to formulate regulations of ensuring that their members who are practising as insolvency practitioner are acting in accordance with code of conduct.
Latha: Are current cases also eligible to be brought in front of the NCLT when it comes or will this be only prospectively applied?
Umarji: They will be transferred to the NCLT. The winding up and other proceedings as far as Board for Industrial and Financial Reconstruction (BIFR) is concerned, all pending cases are abate and the companies can file a fresh case before NCLT.
Latha: Okay, so the banks will file a fresh case in some of the defaulting instances before the NCLT?
Umarji: It could be banks or it could be the company itself which is being default.
Latha: When do you expect that could happen, you expect the NCLTs will be appointed within a couple of quarters or within one quarter itself?
Umarji: I suppose it should be less than a quarter.
Latha: So we should expect that this current load of NPAs we have some bit of recovery or winding up could happen very soon, within a quarter or so?
Umarji: No, actual passing final orders will take time. Once the process starts with NCLT immediately there will be 180 days time. It may be extended by another 90 days so all that will have to be taken into account.
Sanjay Nayar CEO, KKR India
Shereen: What do you think is going to be the most meaningful impact immediately?
Nayar: I don\’t know about the immediate impact but the long term impact I going to be that you are going to have a real credit market in this country in both public and private.
I think the more immediate impact is probably going to be that some of the situations where people thought they could delay and sort of reengineer stuff , that will probably stop. This is a pretty serious and one of the biggest reforms that I have seen in the last two and a half years.
You cannot classify this as a short term thing. This has a massive long term impact which is very positive for attracting capital into companies both retail and institutional. So, from a long term perspective this is extremely welcome.
Harsh Pais Partner, Trilegal
Latha: The Lok Sabha passed the bill and now it’s been cleared by the Rajya Sabha as well, so both houses giving the thumbs up now to the bankruptcy code?
Pais: Yes, indeed it’s a positive development. Also good to see the bill goes through smoothly with the inclusions of the committee and like speaker have mentioned it’s a tremendously positive development not just in immediate term, but for the long term benefit of India’s economy because it provides some additional definition to the credit markets that are necessary for all players in the economy, whether it’s a lender, whether it’s somebody providing equity financing as well, so that the rules of the game are clear and when there is a distressed asset there is an ability to resolve problems without necessarily destroying the underlying business assuming it is a viable one. So from that perspective it will in long term add tremendous efficiencies to the economy.
Rashesh Shah Chairman & CEO, Edelweiss
Shereen: How do you see the markets reacting now to the passage of the bankruptcy code both by the Lok Sabha as well as the Rajya Sabha?
Shah: I think this is a fairly big structural move and quite a few people in the banking industry as well in financial services have been waiting for this, so the bankruptcy code getting passed and now the new law as and when it get enacted and implemented over the next few months is going to be a very big sea change. We all know the issues with NPA and investors and everybody has been looking towards this government to make structural changes and what we saw with the Mauritius yesterday which is also a big structural change which has been in the work for a long time, but now removing uncertainty is a good thing and following it up with a bankruptcy code today is a great step forward and almost everybody whether it’s a banker or NBFC has been waiting for the bankruptcy code to get passed for a quite some time, so we are all very happy about it.
Rajnish Kumar MD, SBI
Shereen: What is it going to mean for creditors, what is it going to mean for someone like you?
Kumar: It’s a very welcome step particularly from banker’s point of view. This was a demand from bankers even last year in the Gyan Sangam, after that through Indian Banks Association and through our own representations. This has been followed up very vigorously and all the bankers and all the creditors they should be very happy and this gives some interim protection also to the companies to workout restructuring of debt and resolution and 6 months time is available and extendable by another 90 days, so normally this is a time required for any asset to be restructured or to arrive at an understanding with the creditors, so this is more or less similar to chapter 11 bankruptcy code in the US. The only thing is the necessary associated infrastructure which may not be exist till today in the country will need to be developed and if that works well then it will be good for everyone for the bankers, creditors as well as the economy as a whole.