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Informist, Saturday, Dec. 7, 2024

 

NEW DELHI – Reserve Bank of India Deputy Governor M. Rajeshwar Rao Saturday said that the full potential of the Insolvency and Bankruptcy Code, 2016, has only been realised for limited areas, even as the law has proven to be a valuable tool for creditors. Moreover, several measures could be taken to improve the overall resolution process further, Rao said at a conclave organised by the Insolvency and Bankruptcy Board of India and INSOL India in the national capital. 

 

Factors such as delay in initiation of the resolution process have constrained the effectiveness of the Insolvency and Bankruptcy Code so far, Rao said. "Time and timing are both crucial for the effectiveness of the resolution process. While delays within the IBC (Insolvency and Bankruptcy Code) process have been widely discussed, an equally important issue is the delay in initiating the IBC process itself," the deputy governor said. 

 

Rao said the average time taken by financial creditors from the date of default to the filing of the corporate insolvency resolution process was often several months, which led to significant loss in value and ultimately impacted the recovery outcome. As such, the role of financial creditors was vital, he added. "They (financial creditors) must take prompt action to prevent further value erosion." 

 

Rao also listed other key areas that could be explored to improve the overall resolution input. First, a better understanding of the reasons behind defaults is required, he said. Whether a default was on account of the general economic environment, specific domestic challenges, or professional mismanagement, a better perspective on this could help tailor appropriate solutions, Rao said.

 

The delaying tactics used by corporate debtors in the insolvency process also need to be addressed, the deputy governor said. Corporate debtors delay the insolvency process using tactics such as delays in submitting information, withholding valuable details, or creating indirect obstacles to discourage potential resolution applicants, Rao said, adding that this must be addressed for the overall improvement of the resolution process.

 

"Finally, examining valuations, the impact of time on recovery and the relationship between the resolution timelines and valuation outcomes could provide us with information which can help us to improve the process," Rao said. "Better valuations at the time of appraisal are the key. Often the gap in valuation between the time of appraisal and the time of resolution and recovery processes is indicative of over-exuberance in valuations and perhaps a lack of due diligence."

 

Technology should also be used to predict defaults before they actually happen, based on the borrowers' turnover data, enabling early corrective action, Rao said. 

 

He called for an ecosystem that encourages revival of enterprises. "While IBC 2016 remains a landmark legislation that has fundamentally altered the landscape of corporate practices in the country, the onus is on us to ensure that collectively, we harness the potential of the code to create an energy ecosystem that enables value preservation," Rao said.  End

 

Reported by Shubham Rana

Edited by Avishek Dutta

 

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