Insolvency and Bankruptcy

Code
Timeline of key schemes
 Insolvency and Bankruptcy Code
At present, there are multiple overlapping laws and
adjudicating forums dealing with financial failure and
insolvency of companies and individuals in India. The current
legal and institutional framework does not aid lenders in
effective and timely recovery or restructuring of defaulted
assets and causes undue strain on the Indian credit system
Basic Terms
• Insolvent- When an individual/firm who has taken a loan
and is not in a position to payback the loan
• Bankruptcy- When an individual/firm is legally declared
as incapable of paying their dues and obligations
• Liquidation- a process of converting assets to cash to pay
the creditors
IBC Process flow chart
 Default types
Special Mention Account

Borrower has taken a loan and has not paid either the interest
SMA 0
or the principle till 30 days then the account will be classified as
(0-30 days)
SMA 0
Borrower has taken a loan and has not paid either the interest
SMA 1
or the principle till 60 days then the account will be classified as
(31-60 days)
SMA 0

SMA 2 Borrower has taken a loan and has not paid either the interest
(61-90 days) or the principle till 90 days then the account will be classified as
SMA 0

Greater than or equal to 90 days then the account will be classified as NPA-non
performing asset

Doubtful-
Substandard- no
no payment for
payment up to 1 Loss-
more than 1 year
year after being No time period
after being
declared an NPA
declared an NPA
 Initiator and Adjudicatory Authority
Initiator- The process can be initiated by both the
creditor and the debtor (Financial Creditor,
Operational Creditor (Government workmen/employee),
debtor) the initiator has to fill up an application
and submit it to an ADJURICATORY AUTHORITY,
this institution decides if this application needs to
be considered
– For Companies it is National Company Law Tribunal
(NCLT)
– For individuals it is Debt Recovery Tribunal (DRT)
 Insolvency Resolution Professional
• They will conduct the insolvency resolution process, take over
the management of a company, assist creditors in the
collection of relevant information, and manage the liquidation
process. The Code bestows such powers and duties upon the
insolvency professional as required to efficiently drive the
insolvency and liquidation process
• The Professional come up with a plan after meticulously
studying and analyzing the reasons for distress. This plan has
be drafted within 180 days, and only in special cases this
period will be extended by 90 days
• This period of 180/270 days is called as moratorium period, it
is a time during the loan term when the borrower is not
required to make any repayment
• This plan requires approval by the Committee of Creditors
 Committee of Creditors
• Two types of creditors:
– Financial creditors
– Operational creditors
• As a lender may borrow from multiple creditors, a
committee of creditors is formulated, this consists
of Financial creditors only
• The plan proposed by the IRP needs to be
approved by at least 75% of the creditors by value
• If the plan is not approved then the company goes
for liquidation
Claims after Liquidation (Priority wise)
• Insolvency Resolution process liquidation costs
• Secure Creditors
• Workforce
• Unsecure Creditors
• Government
• Operational Creditors
• Preference Shareholders
• Equity Shareholders
 Institutions Proposed under the code
• Insolvency Resolution Professionals
• Insolvency Resolution Agents- Control and
monitor IRP
• Information Utilities- This body collects, collates,
authenticates and disseminates necessary
financial information to the Insolvency Resolution
Professionals
• Insolvency and Bankruptcy Board of India (IBBI)-
This is a regulatory body which looks over the
above 3
SDR- Strategic Debt restructuring-2015
• SDR is a tool for lenders to acquire majority ownership
in a borrower by converting a part of the outstanding
loan (including overdue interest) into equity. At a later
date, it can transfer the control to a new promoter
• Initiator of process-the group of banks or JLF that have
given loans to the particular defaulted entity
– JLF, the Joint Lender Forum (JLF) is a committee comprised
of the entire bankers who have given loans to a potentially
stressed or stressed borrower if the account by a borrower
is classified as Special Mention Account 2 (not paid any
money back during the last 60 days)
• The decision on invoking the SDR by converting the whole or part of
the loan into equity shares should be taken by the JLF. The decision
should be documented and approved by the majority of the JLF
members (minimum of 75% of creditors by value and 60% of
creditors by number)
– Example-
• Bank 1: 35 crores
• Bank 2: 45 crores
• Bank 3: 20 crores
If bank 1 and Bank 2 vote in favor of the decision that would mean 80%
by value and 67% by number
Reasons for failure-
• There has been limited will, though, from banks to take on
management of companies through the SDR route. Along with an
apprehension that the existing legal system would not allow a
change of management to take place smoothly, banks were sceptical
of lack of protection from existing and imminent litigations
• Lack of willingness of the banks to provide the “new” buyer with an
appropriate capital structure to turn around the assets has also
impacted the success of SDR
S4A-Scheme for sustainable structuring of
stressed assets-2016
• The lack of a positive response to SDR from
banks have led the RBI to devise other
measures such as S4A in June 2016
• Under S4A, control may remain with the
existing promoter as long as 50% of their debt
is sustainable, hence it is reversal from the
“Creditor in control” stance taken by RBI in
SDR
• 3 conditions for implementation:
– Company/project has to be operating/cash
generating
– The total loan amount > Rs 500cr
– Creditors have to hire an independent agent to
analyze how much of the debt is sustainable and
greater than 50% of debt should be sustainable
• Reasons for failure-
– Limited eligibility as it prescribes a short term cash flow
visibility and loan amount
– Also the lack of emphasis on a comprehensive turnaround
time period could possibly result in the problem just being
postponed
 Impact on Economy
1. Ease of doing Business
• Introducing a modern bankruptcy framework is one of the
most significant reforms put in place by the Narendra Modi
government
• Won praise from multilateral institutions such as the World
Bank and the International Monetary Fund and is one of
the prime reasons for India’s big 30-notch leap up the ease
of doing business rankings

2. Deepening of Bond market

• Successful implementation of IBC (Insolvency and
Bankruptcy Code) would lend confidence to investors,
including foreign investors, and is likely to increase liquidity
 Impact on Economy
3. Boost Start up
• Made it easy for a budding entrepreneur to
start or exit from the startup business.
4. Reduction in NPAs
• Fast resolution of cases will preserve asset
value
5. Professionalization of Process because of
Resolution Professionals.( Special Institutions)
 Key Statistics
• According to World Bank statistics, it took an
average of 4.3 years to resolve a bad debt
• Lenders recovered an average of 26.4 cents to the
dollar. These were among the poorest numbers in
emerging economies
• As many as 21 listed PSU banks have a combined
gross NPAs of Rs 7.3 lakh crore at the end of Sep
2017 quarter. They grew by more than 27% as
compared to Sep 2016 quarter
 Key Statistics
• SBI has the highest share of bad loans (25.4%),
followed by Punjab National Bank (7.8%) and IDBI
Bank (7%)
• As many as 17 listed private sector banks have
combined gross NPA of Rs 1.06 lakh crore at the
end of Sep 2017 quarter
• A growth in NPAs of more than 40%, compared
to September 2016 quarter.
• ICICI Bank has the highest share of gross NPAs
(41.8%), followed by Axis Bank (25.8%) & HDFC
Bank (7.2%) at the end of Sep 2017 quarter