Insolvency and bankruptcy code (IBC 2016) has yielded its first success.
But there are many issues that need to be sorted out.
What is the Bhushan Steel Case about?
Bhushan Steel was one among the 12 major accounts referred to the “National Company Law Tribunal” (NCLT) at the behest of the RBI last year.
These accounts were the biggest of the Non-Performing Assets (NPA’s) that was plaguing the various banks.
Recently, Tata Steel recently acquired 73% stake in the bankrupt firm Bhushan Steel for about Rs. 35,000 crore.
This was through a bankruptcy case under IBC, and hence this becomes the 1st major resolution under the act.
The proceeds from the acquisition will be used to settle about two-third of the Rs. 56,000 crores that Bhushan Steel owes banks.
What are the positives that can be driven from this case?
While the Bhushan resolution is just 1 case that managed more than about 67% recovery, it is nevertheless an encouraging sign for banks.
Notably, before the launch of IBC, if assets get stressed, banks were typically able to recover just about 25% of their dues.
More significantly, between 2014-2017 bad loan recovery rate of public sector banks was just 11%, and about 2.4 lakh crores were simply written off.
More than 1 lakh crore is expected to be recovered in the near future through other cases referred by the RBI to the NCLT.
If the banks do indeed recover funds of this scale, it would reduce the burden on the government, as pressures for bank recapitalisation will ease.
Additionally, speedy resolution would also free valuable assets that can be employed for economic production.
What are the lingering concerns that need further pondering?
IBC legislation has subsumed a plethora of laws that confused creditors and has streamlined the way to deal with troubled assets.
But issues such as the proposed eligibility criteria for bidders have left it bogged down and suppressed its capacity to help out creditors efficiently.
The Insolvency Law Committee has vouched for relaxation of ‘bidder eligibility criteria’ in order to enhance participation, which needs to be considered.
Also, strict time limit for resolution as mandated by IBC merits review in order to balance the objectives of speedy resolution and maximising asset recovery.
