Amid concerns over poor realisation from insolvency resolution, M S Sahoo, chairman of Insolvency & Bankruptcy Board of India (IBBI), tells TOI that how much money is realised depends on a variety of factors and the law is not for recovery, but resolution. Excerpts from an interview:
There is fear that many of the ousted promoters are trying to get entry through the backdoor through people they know. Are the fears justified?
Let me make it clear that there is no prohibition on promoters to retain their companies through a competitive resolution plan. The prohibition is on a person, whether a promoter or not, who does not have credible antecedents. Any person, connected or related to the prohibited person, is also prohibited. He is also prohibited from buying assets in liquidation or participating in compromise or arrangement of the company. Therefore, backdoor entry is not possible. However, in their endeavour to cling on to the company, some promoters may genuinely believe that either they are not prohibited, or the law prohibiting them is not just, or there is a way to get around the law. They try their luck up to the highest court. There has, however, not been a single instance where a prohibited person has gained control of a company through a resolution plan.
They may not be promoters or their family members, but those who have been associated with the promoters. Are more steps required?
Some of it may be hearsay. The law prohibits every person, natural as well as artificial, who is connected with the business activity of the prohibited person. Further, a basic premise of any law is that what cannot be done directly cannot be done indirectly. I think, the extant provisions are adequate.
One of the major concerns is about a haircut, which in one case was described as a tonsure. Is that a concern?
The question to ask is why does IBC process yield zero haircut in one case and 100% haircut in another for creditors? It depends on the nature of business, health of the economy, marketing efforts, etc. It critically depends on at what stage of stress the company enters IBC process, as much as at what stage a patient arrives at the hospital. If the company has been sick for years, and the assets have depleted significantly, the IBC process may yield huge haircut or even liquidation. The IBC maximises the value of the existing assets, not of the assets which do not exist. It has been realising, on average, 190% of the liquidation value of the existing assets, for creditors.
Tinbergen Rule, named after the first noble laureate in Economics Sciences, Mr. Jan Tinbergen, stipulates that a policy must not have more than one objective. The IBC has only one objective, that is, reorganisation. It reorganises the affairs of a company to rescue it if its business is viable or to close it if its business is unviable. Such reorganisation has several intended benefits, namely, promoting entrepreneurship, improving credit availability, maximising the value of assets of the company, balancing interests, etc. Recovery is neither an objective of the IBC nor even one of the intended benefits, as evident from its long title. It may be appropriate to talk about haircut in case of a law/policy which has recovery as a target.
One of the ideas was to fast-track resolution process and therefore 180 days’ time limit was set with possible extension of another 90 days. But it is taking longer. Are you satisfied with it?
Yes and no. Yes, as compared to pre-IBC days. Earlier it took more than four years. Now it takes around 400 days. No, as compared to our intention. It must be appreciated that we are doing something for the first time. We must allow some more time for the new law and ecosystem to mature and settle down.