IBC Code Details by capital tree

Insolvency and Bankruptcy Code, 2016 – Paving Way for Inclusive Governance in Borrowed Entity

Post-1991, the Insolvency and Bankruptcy Code (IBC) 2016 is the biggest reforms in developing sound financial markets in India. There have been different interpretations as to the different purposes being served by IBC. The Analysts have been differently interpreting the objectives of IBC in the following way.

  1. Ensuring Faster Exit to Risk Capital in case of any fallout
  2. Creation of Bond Markets in India,
  3. Address the situation of mounting NPL (Non-Performing Loans) in Public Sector Banks
  4. Introduction of Single Legislature in different situations connected with the Insolvency or Rehabilitations of sick enterprise

However, we feel that besides serving the above objectives, the targeted effects of IBC are far-reaching. IBC intends to complete revolutionize the system of Corporate Governance in the country. It is worthwhile to mention that besides Corporate, the act also seeks to regulate the working of non-corporate entities. The non-corporate entities are generally partnership firms and proprietorship entities etc.

IBC seeks to create a self-enabling legal framework. Wherein, the market forces (investors, Lenders or Creditors) are in a position to find their role in the governance. They may exercise the above rights through Insolvency Professional. In the matter of recovery of their legitimate dues from the borrower entity. This is in complete contrast to their earlier and only dependence towards invocation of regulatory intervention for every possible infringement of their rights. In certain circumstances, their rights might be infringed due to some vested or conflicting interest of the management of the borrowed entities representing the majority shareholding.

These regulatory rights available to above market forces and other stakeholders of the company fail to serve their purpose as

  • They are highly complex,
  • They lack harmony with other similar legislation, therefore creating an environment of uncertainties
  • The system for their legal adjudication also carries a lot of hassles due to procedural delays and legal abruption.

 

The final adjudication award also loses its significance on account of the exponential time taken by the adjudication authorities in the resolution of their grievances.

The introduction of IBC is a significant step further to outline the famous saying of our Prime Minister “More Governance Less Government”. This shows that financial markets in India have inched towards a step further from Regulation to Governance especially in the administration of corporate entities.

Corporate Democracy – How Effective Majority Shareholding Rules?

For long, the corporate democracy in India is based upon the majority rule wherein “Majority Shareholders have the rights to determine everything connected with the management of the company”. However, the rights given to the majority shareholders cannot be absolute and unconditional. Besides, the shareholder’s groups representing the majority and minority parts, there are other stakeholders who contribute to the growth of any corporate entities. These include lenders, secured and unsecured creditors and also the employees.

In various situations, there may be conflicting ends of different stakeholders while managing the corporates entities. There should be a platform providing for inclusive governance in the management of corporate rather than their sole dependence of invocation of legislative action in every instance. This is more especially required in a scenario when there is constant and erratic financial management in the company. This poses a threat to their interest. In such situations, there is a need for ensuring that there is an arm’s length difference between control and ownership. In this regard, IBC code promulgation is a beginning and much-needed step in this regard.

Illustration

1. Corporate Entity Stakeholders

Shareholders

Lenders

Financial Creditors

Operational  Creditors

2. Corporate Entity

IBC code

3. Majority Shareholder Does the Front Ending

IBC code

Now in case, there is some financial default to the interest of Financial Creditors, operational creditors, lenders. Instead of maintaining status-quo on current management representing majority shareholders, the stakeholders can apply to NCLT for applying for appropriate relief. NCLT in consultation with financial creditors may name “Insolvency Professional” which may act as interim professional or final Resolution Professional for drawing a rehabilitation plan in consultation with stakeholders.

A Resolution Professional will draw rehabilitation or winding up plan in consultation with stakeholders and approved by Committee of Creditors.

IBC code

Ease of Doing Business – Capital Essential however complex legal structure acts as deterrent

India currently stands at No.130 in the world list of the countries on parameters of “Ease of Doing Business in India”. The such a poor performance rating of our country assumes a greater challenge in a scenario where India currently stands as second largest growing economy of the world after China. India stands as a country with a highest FDI inflow in year 2016.  Despite an extremely negative performance on business ranking, the growth trend in Indian economy evidences the existence of wide scale. However, to achieve this, the country needs to invest heavily in building the core infrastructural development activities.

This will not only push the further investment of the economy through

  • Creation of demand
  • Employment opportunities
  • Bringing down the cost of production through core-infrastructure development
  • Increasing the competitiveness of indian corporates.

 

Form of Money Flow to India  – Requires Change !

The above necessitates a large and serious flow of external capital (equity and debt) in our country. Most of the capital inflow in India is coming in the form of Portfolio Investment. The main reason for the same is the opportunity for easy repatriation of capital at the time of any adversities.

However, it may be more rewarding to invest in companies on a Direct Investment route (rather than secondary market) as the value unlocking chances are greater in this case. The same can be monetized swiftly at the time of listing of the corporate on the stock exchange. From the point of view of our country, the same will provide a much stable and long tenor duration of foreign investment. This longevity of the equity investment will provide much needed cushion to the debt capital and will assist the achieving the financial closure of infrastructure projects in India.

In spite of the same, the Direct Investment by external investors in the corporate entities has not picked up the speed due to

  • Complexities of doing business in India
  • Complex legislator framework
  • Absence of enough liquid financial markets.

Indian Business are heavily dependent upon the traditional. Limited sources of raising funds for meeting their capital and debt requirements despite a substantial improvement in their funding endeavors in the recent past.

The Passage of IBC is expected to lift the sentiments of foreign investors towards indian legal framework of India which is expected to intervene swiftly for protection of their rights on early detection of any problem in the corporate entity.

Bond Market can act as pre-cursor to development of sound financial market

As it takes time for achieving a large scale external equity participation in the country as the flow of equity the funds is dependent upon overall improvement of the investment cycle in the economy. However as a preliminary steps, the flow of funds through other form of debt capital i.e. Corporate Bonds in the economy can also bring much needed change in this regard. Till now, there has been a significant inferior legal treatment to corporate advances represented by Corporate Debt market. The debt amount borrowed from designed lenders and NBFC carries protection under SARFASI Act, 2002. SARFASI Act is an important legislation in the matter of collection of dues from a borrowed entity. This legislature does not cover money borrowed or advanced through the instrument of Corporate Bond.

Till now there has not been any singular legislation. Which seeks to address the challenges of conflicting aspirations of different stakeholders. As there not only multiplicity of law and also overlapping of legal provisions in different statutes. The Bond Holders or Shareholders can now easily intervene the provisions of IBC in deserving situations for a participatory governance. In Corporate Entities for protection of their rights like Financial Creditor.

 

Investment Requirements – Easy Travel at Entry or Exit scenario

Easy “Entry and Exit” are two important sub-set of inviting a long term capital. The Easy Entry and Exit not only signifies the need of less procedural statutory compliance. More importantly increase the cause of “Willingness of Investors and Capital for easy travel” in both entry and exit in every investments decision.

It is based upon the economic principle of Demand and Supply or “Willing Buyer and Willing Seller” position. The economic principle holds good in all scenario of factors of production e.g. Land, Labour, Capital & Enterprise. The sustainable and long term economic development can be reached in any economy where market forces (opportunities and capital) act as a sole balancing factors. The balancing factors will always tend to maintain the Equilibrium position in financial markets and prevent any exponential and over “Heating up or Downfall” in the market and afford much needed protection and stability to both enterprise and investors. The Regulator’s role should be limited and intervened only in certain situations of any manipulative practice in situations of any cartelization or otherwise.

We feel that on the structural reform side, IBC intends to address the desired situation to a large extent. The effect brought about by IBC into economic system will be felt later and gradually, however on the perception sides, it is indeed a welcome and much needed promulgation.

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