December 2021

Committee of Creditors Approval in Corporate Insolvency

Insolvency and Bankruptcy Code which came into effect in the financial year 2016, has been the most effective code for the insolvency proceedings in India.

One can even state that the invention of the code has been revolutionary for the banking sector, given, the state of haphazard the industry finds itself.

It can also be maintained that with the advent of the code, the industry saw the demise of the laws for liquidation and insolvency in the Indian bankruptcy regime.

But given that even the IBC brings to the table the option for liquidation, how exactly is the code different from the prior process of liquidation? It is to be noted that the crux of the code encapsulates effective objectives like maximizing the value of assets of a corporate which were barely recoverable under the arcane laws and emphatically easing the businesses by effectively minimizing the financial risk in business.

Thus, it can be effectively stated that the code significantly improves the condition of the financially distressed company by recovering its value through its effective time-bound manner of work.

Even though the IBC helps in the recovery of payments from the defaulter, its main focus is on the relief of the creditors of the company.

It is worth mentioning here that under the Corporate Insolvency Resolution Process, the creditors have placed ion the pinnacle of utmost importance.

Thus, given its newfound, enhanced role, the committee of creditors has been emphatically seen as playing a major role in the regime of insolvency. In fact, If the procedure is to be believed, the committee of creditors wields the utmost power and is effectively considered the supreme decision-making body in the Corporate Insolvency Resolution Process.

Thus, one cannot help but note here that the effective decisions by the committee will affect the resolution of the insolvency of the corporate debtor.

Under particular regulation 21 of the code, the committee of creditors finds the seed of its formation. According to the code, the committee of creditors shall emphatically and strategically comprise all the financial creditors of the corporate debtor.

To remove the barrier and the arbitrariness of distinction, the code also effectively makes a clear distinction between the financial creditors and the operational creditors.

If a financial creditor is to be solemnly described, it effectively means anyone to whom the debt along with interest is owed. On the other hand, an operational creditor is one who has debts related to the supply of services and goods.

The power-wielding committee of creditors

As aforementioned, the committee of creditors is described as the supreme decision-making body. Thus, all the major or humungous decisions about the company are effectively taken with the approval of the committee.

Therefore, one can state that the committee of creditors has a humungous authority to affect the insolvency process.

This is also due to the fact that the committee can call the shots on sensitive topics like whether or not to restore the corporate debtor by strategically accepting any resolution plan.

In fact, it is worth mentioning here that the committee of creditors has the supreme power of approving the proposed resolution plan.

This strongly indicates the fact that the committee has an undue influence on the insolvency process, which will be tackled by its whims and decisions, thus, deciding the fate and the regular functioning of the corporate debtor.

In fact, it is also worth mentioning here that the committee of creditors also enjoys the authority to approach the adjudicating authority.

This can be done in the case of any foul play event that can be detected by the committee. This emphasizes the fact that the conditions of foul play and what determines it will be emphatically be decided by the committee, which surely puts humungous, undue power in the hands of the committee to sway the decision-making in the insolvency process.

The authority can also be effectively evaluated from the fact that the co9mmitee can also choose to proceed with the liquidation of the corporate debtor by not approving any resolution plan.

Thus, in a gist, it can be stated that the insolvency process depends heavily on the commercial wisdom of the committee while taking any decision for the corporate debtor.

This is because it is staunchly believed that the committee of creditors has better knowledge to mediate and analyze the debilitated situation of the company.

Thus, one can effectively argue that the committed creditors have been vested with immense powers under the insolvency and bankruptcy code 2016. With immense power bestowed on one committee, it can be stated that effects on the resolution of a company under distress can be immense and humungous.

With even a little whimsical attitude, one can conjure that it will have a negative impact on the

financial health of the company that will nonetheless affect the process of insolvency in due course.

But on the other hand, one can also maintain that if the creditors can take absolute control of the

management of the corporate debtor, important decisions and the resolutions plan can be passed in a timely, swift manner which can help recover a larger value of the assets and will thus ease the financial risk in a company.

Thus, if the power is to be used sagaciously and prudently, one can expect such creditor-in-control model management to usher the banking sector into a stronger bankruptcy regime in India.

Tags: corporate debtor, insolvency proceedings in India, company insolvency, committee of creditors, insolvency resolution process, bankruptcy code 2016, liquidation committee, insolvency liquidation, liquidation act, insolvency and liquidation, corporate insolvency resolution process

Criticism of Banking Code in India

It is no news that the landmark economic reform in the Indian banking sector, in recent years has gathered intense criticism of the banking code in India.

The criticism comes from various sectors that perhaps are not finding the reform quite affable for their needs. It is to be noted that the genesis of the Insolvency and Bankruptcy Code (IBC) was at the back of the debilitating bad loans crisis that was severely crippling the Indian banking sector.

With its immense effects on the economy, the problem was proving to be a debilitating, adverse hurdle for the growth of not only the banking sector in India but also the economy.

The economic reform was introduced for timely resolution of the bad loan crisis. But given the progress that has been made in recent times, it can be stated that the reform has largely been ineffective at best and counterproductive at worst.

Though such assessments or rhetoric have been made under political influence or bias, scrutinizing the problem through the data-intensive and objective lens for its critical evaluation is necessary.

Primary Criticism of Banking Code in India Against IBC

If the concerns are to be scrutinized, the primary concern that shores up is that the mechanism has garnered paltry recoveries, which has made the reform a mere legal mantelpiece.

Such criticisms have been made by the critics who have adamantly stated that instead of materializing as a powerful tool for economic value creation in the banking industry that should have helped to mitigate the crisis, it has merely reduced to being an incompetent reform. Given the aforementioned arguments presented, it can be stated that the arguments are based on some very fragile assumptions.

It cannot be denied that the banking processes involving recoveries etc. usually are impacted by various macroeconomic and environmental events. This usually leads to the unstable value of the asset in question over time.

But is the macroeconomic environment solely responsible for such variable value? Perhaps not. The competitive dynamics of the industry within which the firm also play a crucial role.

Therefore, to truly scrutinize and evaluate the IBC on recoveries, we need to take into consideration the diversified that includes relevant facets of several industries and business cycles.

If the data by the apex bank is to be analyzed, the average recovery for three years has been around 45 percent, which according to critics has been dismal.

On the contrary, many firms and critics have come out with even lower statistics of a mere 24 percent in cases of individual recoveries.

Thus, given the critics’ harsh assessment of IBC, the critics need to be reminded that absolute numbers don’t matter or aren’t as meaningful as many might consider them to be.

Additionally, the critics need to be reminded that every process has a distribution of outcomes that may be skewed. Thus, given the ineffectiveness of absolute numbers, analysis in comparison to benchmarks need to be made.

Recovery under the IBC can be evaluated only with respect to benchmarks, in order to ensure unbiased review.
The most comprehensive benchmark is the rate of recovery that can be gained under alternate mechanisms. ARC, also known as the Asset Reconstruction Company, according to RBI, As RBI data shows, average recoveries for asset reconstruction companies (ARCs) have largely languished for the same period, remaining under 30%.

Similarly, in the case of Debt Recovery Tribunals is to be scrutinized, the recoveries under the reform have effectively surpassed the 45% recovery mark only thrice in the mammoth 17-year period. In fact, if the data for the last few years is analyzed, the recovery has been languishing with single-digit recovery rates.

Therefore, to draw out a comparative analysis, it can effectively be stated that IBC’s recovery rates have not been abnormally low. one can even state that as a matter of fact, the recovery rate has been even higher than the historical averages of alternate resolution mechanisms aforementioned.

But how does this analysis take into consideration the abysmally low recovery rates in certain individual cases? It is to be noted that is effectively true for any bankruptcy process.

According to many findings, it has been found that between the financial years 1982 and 1999, the average recovery rate for American companies has stood at 51.1% with a standard deviation of this rate being as large as 36.6%.

This effectively and emphatically implies that there are various causes of high and low recoveries and what we look at is mere average.

Thus in totality, despite the blaring criticism by the critics and the limitations of recovery data that do not help in an objective analysis of the matter at hand, it can be emphatically maintained that the stance that India’s IBC is sham or incompetent is completely unwarranted and misguided.

As aforementioned, the averages and absolute numbers do not showcase the competition for the reality of the reform and thus objective and rational analysis requires comparative analysis so as to minimize the bias.

But it is also worthy of mentioning here that the IBC reform is not infallible or perfect either. With the large number of cases increasingly being liquidated, one can state that IBC too requires restructuring and up-gradation of its own.

Given the importance of IBC in the Indian banking sector, its success and smooth functioning are of utmost importance for growth in not only the banking sector but also the economy.

Thus, in totality, IBC can neither be characterized by blaring criticism nor euphoric appreciation.

Tags: bankruptcy code in india, insolvency and bankruptcy code, banking sector in india, the insolvency and bankruptcy code, banking code in india, ibc insolvency and bankruptcy code, banking industry in india, banking system in india, insolvency and bankruptcy code act, indian insolvency and bankruptcy code.

RBI Monetary Policy & Global Bond Markets

1. The RBI monetary after the pandemic had curtailed the freedom of many central banks to play with the interest rates for a while. With the increasing option of lower interest rates that were needed last year, the accommodative policy might now be coming to an end.
2. This would mean that the central banks around the world would surely have their work cut out. But is it? The answer is much more shades than plain black and white.
3. It is to be noted that the pandemic had been receding across the globe, leading to lower cases.
4. But just when the monetary authorities were emphatically and effectively preparing the ground for a reversal of their ultra-loose policies that were earlier adopted in response to the coronavirus crisis, it clearly seems that such an option won’t be viable for some time now.
5. From bracing for interest rates in major economies to head northward sooner than later, global bond markets on Thursday took a 360-degree turn.
6. But what circumstances compel the banks to derail their plan to tackle inflation? The discovery of a new potentially dangerous and deadly variant of the coronavirus in South Africa, Hong Kong, and Hong Kong has sent the world order into a frenzy all over again.
7. This has been coupled with the resurgence of cases in the western world, especially in Europe. This has emphatically led to the restrictions that have been placed on the economies and world travel which will have its consequences in the long run as the risk to global growth has intensified.
8. This claim can be corroborated by the price action in the global bond markets. It is well known that decision-making in the market is laced with indecision, irrationality, and whims.
9. This has been recently shown in the market as instead of getting ready for imminent policy normalization, as should be expected of the market, the bond markets seemed to be expressing the jubilant and exuberant view that the monetary accommodation would stay for a while longer.
10. Thus, one can quite clearly state that the investors are actually betting on the central bank’s accommodative, helping policies, to usher them out of the state of crippled finances.

But what does all this narrative mean for India? It is to be noted, that according to the reports, the Indian sovereign bonds have been enjoying the yield on the 10-year benchmark of 6.10 percent.

This perhaps is due to more palpable reasons that prior to the odious detection of the fresh variant in South Africa, the market was holding a stronger view of the bank’s interest policy and was emphatically anticipating the process of raising interest rates.

This was being anticipated in its next policy statement, which would have been achieved by raising the reverse repo rate. Therefore, this would have led to the narrowing of the width of the liquidity adjustment facility corridor.

Though, it is worth noting here that the central bank has already paved the way for this step. This is due to the fact that the quantum of funds has been withdrawn and the cutoff rates have been set at a variable rate.

But even though through all market actions, the money markets may have aligned to the new expectation of the reverse repo rate, the actual act of raising the reverse repo rate would itself have significant implications.

This would namely be the ultra-loose accommodation being reversed. This is merely due to the fact5 that the banks have the credibility factor and one would hardly expect that the central bank will actually reverse its stance.

This fact spe3cially garners more importance due to the fact that the bank has officially started the process of lifting interest rates.

But given the strong proposition above, is there no other narrative that is prevailing in the market? The answer is apparently no.

The other narrative that is floating in the market is that given that India is still a nascent economy, that is recovering and is facing a threat of a new variant, it is quite a possibility that Governor Shaktikanta Das will indefinitely keep all rates on hold.

This can also be anticipated as the central bank might choose to evaluate the global situation to obtain more clarity on the spillovers for India before it makes a major policy change.

Though, if the issue is to be scrutinized through an affirmative lens, one can state that India will bear the salutary impact of the new risk to global growth by a decline in international crude oil prices that has been pestering the p[public for quite some time now.

Even though, as has been witnessed, the government has reduced excise duty on major petroleum products, it cannot be forgotten that over the last couple of months a significant risk to inflation has emerged as the outlook on the trade deficit is widening.

Thus, it can be effectively argued that the scales are perfectly balanced for the central banks as there is almost a consensus that the reverse repo will be hiked, as the market rates had aligned perfectly to a higher rate.

But given the recent circumstances, one can add that RBI can still maintain the status quo due to changing dynamics of world affairs and trade.

Even though some might argue that the agenda for hardening the inflation has taken a backseat, for now, one can never be sure in which option’s favor will the tables turn.

Tags: central banks, global bond markets, rbi monetary policy 2021, rbi monetary policy, rbi monetary policy repo rate, rbi policy, rbi monetary policy today, new rbi monetary policy, rbi monetary.