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Contents
Preface p2/ Foreword p3/ Journey of IBC since inception p4/
Survey Results p10/ About CII p24/ About PwC p25
Decoding the Code:
Survey on Twenty One
Months of IBC in India
www.pwc.in
Preface
The Insolvency and Bankruptcy Code IBC has also driven massive M&A
(IBC or Code) is one of the most effective momentum in the country; several
reforms brought in with the potential domestic and international investors
of transparently and expeditiously (including private equity firms) have
resolving India’s overwhelming non- been actively participating, given the
performing assets (NPAs) conundrum. opportunity to acquire valuable assets
With a strict 180+90 days ‘resolve-or- at attractive prices, with the prospect of
liquidate’ diktat, the Code has received generating higher returns.
commendation, not only from the Indian The apprehension of losing control over
Industry, but from the global fraternity, their companies has prompted various
including The World Bank and IMF, and promoters to settle or resolve their dues;
has materially contributed to India’s which presents a huge opportunity for
30 place jump in 2018’s ‘Ease of Doing investors. Going forward, IBC legislation
Business’ ranking. should become a significant catalyst for
IBC truly enforces the concept of improving debtor behaviour.
‘creditor in control’ instead of ‘debtor This report highlights the perspectives of
in possession’, and maximises value different stakeholders, on the progress
recovery potential corporate debtors. made by the Code, challenges faced
Once the resolution process starts, the and impediments that merit further
board cedes control of the company, and attention. The report is also backed by a
insolvency professionals, with the help detailed survey of key stakeholders, who
of professional advisors, start managing have shared their experiences thus far.
the company.
We hope this report will be helpful to
gain an interesting perspective of the
journey of the Code so far.
Confederation of Indian Industry
2 PwC
Foreword
Most of the IBC changes affected the Cross border insolvency regulations:
borrower, the outgoing owners and These need to be urgently notified. Non
the investor or resolution applicant recognition of Indian laws in overseas
community. In particular, investor jurisdictions, and vice-versa, has created
groups and resolution applicants have certain challenges. It also leads to
felt that they have been chasing a uncertainty amongst foreign investors
‘moving target’. As far as investors are on recovery procedures. Another major
concerned, while they would like a lot drawback are bilateral treaties, which
more certainty this has not dimmed result in non-uniform approaches to a
Sanjeev Krishan their focus on assessing investment resolution process.
Partner & Leader options arising from the enactment of
the IBC. They have focussed both on Group insolvency rules:
Deals and Private Equity
PricewaterhouseCoopers Private Limited determining opportunities to resolve It has been observed, particularly in case
and revive businesses in insolvency, as of infrastructure and EPC sectors, that
well as ensuring that they do not miss the holding company is put through the
out on the pre-insolvency investment insolvency process, but the subsidiary
In the usual course, it is hard for any
themes, where promoter groups have companies are not. In these cases, the
business to take action against its
become more willing to go that extra experience has been that the resolution
customers, no matter what challenges
mile to resolve issues with banks. This for individual companies is tough and
it faces. The story has been no different
is emerging as the biggest opportunity some of these face liquidation, as opposed
for banks and the wider institutional
and more than the IBC, it is the fear of to resolution. A combined resolution
lending platforms in India. It is quite
IBC that is generating a lot of investor plan for debts for the group could
easy to start debating the reasons why
interest. The bankers have not been prevent this from happening and result in
they find themselves in this situation, but
far behind and many of them have maximisation of value for lenders.
that is not the intent of this publication.
considered portfolio trades or pre-
No wonder then the Reserve Bank of Dissenting creditors given preference:
insolvency single asset resolutions
India, underpinned the enactment of
(pursuant to the circular dated More often than not, dissenting creditors
the Insolvency and Bankruptcy Code
12 February 2018) in recent times. are given the benefit of payments as
2016 (IBC or the Code), to get down to
opposed to assenting creditors. This is
‘resolving’ the challenge that they faced– While various issues that have been
causing an interesting dynamic to play
the mountain of Non-Performing Assets raised over the last few months, have
out–in case the initial or upfront infusion
(NPAs) that they carried on their books, been clarified basis interactions with
of funds is less, it is quite possible that
which as per the latest estimates, exceed the lending community and investors
assenting creditors get nothing to begin
10.25 lakh crores INR (approximately in particular, some still require
with. This is making assenting creditors
150 billion US$) as on 31 March 2018. additional consideration:
look at the proposed resolution plans
The IBC has been a revelation, both in Conflict amongst lenders: a bit differently–again this will have
its original and (current) revised form; the effect of pushing many insolvent
Typically, an insolvent company has
it is important to note that the IBC has businesses into liquidation.
multiple lenders with multiple charges
seen multiple changes since its inception, spread across various assets. The IBC Judicial infrastructure enhancement:
most of which have been well directed. disregards differential rights across
At the outset, kudos to the regulators At the moment, there are 11 NCLT
the same asset class that lenders have
for being so agile in plugging potential benches and 1 NCLAT bench. There have
funded differentially. This has resulted in
loopholes in the initial version of the been challenges to cope with the huge
conflicts amongst lenders and subjected
Code. Considering that the Code was number of cases that have got referred to
resolutions to legal challenges.
initially being tested on the twelve them, causing further delays.
largest NPAs in the banking system, this Operational creditors’ rights: The IBC has been a landmark legislation
was much needed. Twenty One months Many resolution plans are currently being and it will continue to evolve. While
since the enactment, one can say that litigated by operational creditors, due to some of the matters listed above came
there is a reasonably robust insolvency near zero or very small amounts provided across as areas, which require more
law. So much so, that some of the for them in resolution plans. While they thought and consideration, the issue
questions that this survey raised with the are eligible to get a share of the liquidation that IBC deals with is such that there will
participants have been “answered” even value, in most cases, the liquidation value always be other unforeseen challenges.
before the results could be published! is very low and insufficient to pay even
This survey presents the feedback
financial creditors— accordingly they have
received from investors, lenders as well
been challenging resolutions. While some
as the legal community.
of them have managed to force the issue,
most of the operational creditors in the We hope you find the report interesting
MSME space are not able to do the same, and informative. We look forward to
and hence, groups of operational creditors your feedback.
are coming together to litigate.
Decoding the Code: Survey on Twenty One Months of IBC in India 3
Journey of IBC since inception
Non-performing assets (NPAs) have and banks invariably got into severe
become a major challenge for both public competition with each other to fund
and private sector banks in India. In the mega projects. The GFC followed by a
exuberant milieu that started around period of policy in action meant that
2005 and continued for three years until these large projects either remained
the global financial crisis (GFC) of 2008, work-in-progress owing to delayed
large corporations conceived major environmental or approvals, or even if
projects in capital-intensive sectors such completed, under-utilised. As project
as power, ports, airports, housing and owners did not realise anticipated cash
highway construction. Banks were keen flows over extended periods of time,
lenders, with their aims of supporting bank loans began to go sour, thereby
the capacity build up in core sectors such triggering the significant NPA build up.
as power and steel, as well as India’s Accordingly, the NPA story is not new to
infrastructure development across roads, India and several steps have been taken
ports and real estate sectors. Considering by the Government on legal, financial
how under invested India was and the and policy level reforms—most of these
huge consumer market it presented, had moderate to low success.
this seemed to be a big opportunity
Figure 1.1 - Debt resolution mechanisms in India had evolved since 1985…
Sep – 2016 Dec – 2016 Feb – 2018
Asset Reconstruction Insolvency and Resolution Plan under
Companies (ARC) Bankruptcy Code (IBC) RBI guidelines which
subsumes previous 2018
schemes
Dec – 2014 Jun -2015 Jun – 2016
Flexible Structuring of Strategic Debt Scheme of Sustainable
long Terms Loan (5:25) Restructuring (SDR) Structuring of Stressed
Assets (S4A)
2002 2014 Jan – 2014
SARFAESI Act – ARCs Announced asset Revitalising Distressed
classification forbearance Assets in the Economy
on Restructuring ended (SMA and JLF)
from MAR-15
1985 1993 2001
Sick Industrial Recovery of Debt dues Corporate Debt
Companies (Special to Bank and Financial Restructuring Cell (CDR)
1985 provisions) Act (BIFR) Institutes Act (DRTs)
4 PwC
The Sick Industrial Companies (Special The RBI also instituted several • The Strategic Debt Restructuring
Provisions) Act, 1987, popularly known mechanisms to deal with NPAs from time (SDR) mechanism, introduced soon
as ‘SICA’ was enacted to address sickness to time, a few of them are as follows: after, was also not lucrative for
in the industry. It was under this lenders. While the scheme seemed
enactment that the Board for Industrial • Corporate Debt Restructuring (CDR),
interesting initially, it soon became
and Financial Reconstruction (BIFR) which was purely a contractual
evident that there were no buyers in
was formed to oversee the rehabilitation arrangement between the lender and
cases where it was being invoked.
of sick units. However, instead of the corporate. It thrived and met with
addressing sickness in the industry, BIFR success given the revised prudential • The RBI then introduced the S4A
itself became a sick institution and a norms on restructuring of advances. Scheme, which only covered projects
refuge ground for defaulting borrowers However, once prudential norms that had already started commercial
who tried to take advantage of the were withdrawn in 2015, the CDR production. Furthermore, the scheme
indefinite moratorium under SICA. mechanism also lost its purpose. was also silent about unsecured
creditors, who could always approach
Then the Securitisation and • The so-called Joint Lenders’ Forums
a court of law and play spoilsport.
Reconstruction of Financial Assets (JLFs), which mandated that banks
and Enforcement of Securities Interest adopt measures for early identification These measures, though in the right
Act, 2002 (SARFAESI Act ) was to tackle stressed loans, giving them direction, did not have the desired result.
enacted to let banks as well as other a jumpstart, especially in large and There was now a dire need to address
financial institutions of India auction complex cases of corporate debt where the growing NPA.
commercial or residential properties creditors differed on a resolution
for the purpose of loan recovery. Asset process. According to the JLF
Reconstruction Company India Limited framework, at least 75% of creditors by
(ARCIL), the first asset reconstruction value of the loan and 60% by number
company, was established under this of lenders in the JLF need to agree
act. However, SARFESI too had its own on the restructuring plan. Obtaining
set of limitations. a consensus was a major bone of
contention, which in turn, reduced the
effectiveness of JLF.
Decoding the Code: Survey on Twenty One Months of IBC in India 5
Insolvency and Bankruptcy Code: a new dawn
Institution of IBC The Code has also received significant IBC consolidates multiple schemes
attention from foreign investors. announced earlier and focusses on a
and its objectives
time-bound resolution coupled with
IBC brings about a paradigm shift in
Insolvency and Bankruptcy Code maximisation of value. The RBI, in order
the recovery and resolution process by
(IBC) was enacted in 2016, with the to align the resolution mechanism with
introducing the concept of ‘creditor in
objective of ensuring speedy resolutions IBC subsequently withdrew all circulars
control’ instead of ‘debtor in possession’.
while signalling a break from the past. such as the CDR, the Flexible Structuring
This encourages value enhancement of the
There were large macroeconomic of Existing Long Term Project Loans,
corporate debtor as once this process starts,
objectives at play such as solving the SDR, Change in Ownership outside SDR,
the board cedes control of the company,
twin balance problem, developing 5 by 25 scheme and S4A. The JLF—as an
and insolvency professionals with the help
a robust corporate bond market, institutional mechanism for resolution of
of advisors start managing the company.
improving the credit environment, stressed assets was also discontinued. `
Creditors now have guidelines that
and consequently providing a fillip to
clarify details till the last mile, including
India’s competitiveness as a business
distribution of recovery proceeds.
destination. The new code was designed
to streamline the corporate insolvency
resolution process, which among other Figure 1.2 – recap of IBC
things, prevents value destruction
if there is corporate distress. The
‘One’ Law for bankruptcy Time-bound process
resolution process is a representative
action for the general body of creditors
and not for the recovery of money of an 180 days to resolve insolvency
individual creditor. 2 laws repealed 11 amended days, if extension is granted in
Being a time-bound process to resolve 270 some circumstances
cases within 180 days extendable to 270
days, the IBC has received praise from the
World Bank and IMF and has materially No deadlock No asset stripping
contributed to India's 30 place jump in Bankruptcy resolved in prescribed time • Creditor is king and IBC is creditor driven.
2018’s 'Ease of Doing Business' ranking. If not resolved on time—assets to be Creditor indirectly takes control of the
sold (liquidation) board/assets of debtor
• Insolvency professionals takes charge of
assets on behalf of creditors
6 PwC
Infrastructure to support the suggest modifications required by the After the introduction of IBC, there was a
IBC to fine tune it and plug-in loopholes. possibility of an alternate interpretation
implementation of IBC
The recommendations of the committee of the code. Promoters would bid for
In less than a year of its enactment, that were accepted were brought in as their businesses in an attempt to retrieve
new networks of the National Company amendments to the Code. For instance: them at a heavy discount and start
Law Tribunal (NCLT), the new afresh with a clean balance sheet. As
• Homebuyers to be treated at par with
regulator ‘Insolvency and Bankruptcy this was not the intent of IBC, suitable
financial creditors—they can also take
Board of India’ (IBBI), new stream of amendments were made, after which
builders to bankruptcy court
professionals ‘Insolvency Professionals’ it is extremely difficult for defaulting
(IPs), new stream of Information • Lenders to decide turnaround or promoters to participate in the resolution
‘Information Utilities’ (IUs) and liquidation by 66% vote, down from process of the corporate debtor.
Insolvency Professional Agencies (IPAs) 75%— decision-making easy
The amendments are not only limited
were established to control and monitor
• Redefines entities disqualified from to IBC, but the entire eco system. One
the IPs’ registrations and proceedings.
bidding for bankrupt firm—widens the such measure was to raise the minimum
The IBBI charted the course of it’s
pool for bidders upfront payment made by ARCs from
implementation under the guidance of
5% to 15%, which discourages the use of
the Ministry of Corporate Affairs (MCA), • Withdrawal of application admitted
ARC platforms by lenders for long-term
Government of India. under IBC by approval of 90%
warehousing of bad loans. Furthermore
lenders—exit opportunity to corporate
the market regulator Securities and
debtors for better settlement outside
Fine tuning IBC Exchange Board of India (SEBI)
IBC purview
exempted companies under the IBC from
Constant improvements and updates
• MSME promoters can bid for their adhering to prescribed delisting norms
to IBC have followed in response to
enterprises, which are undergoing with certain riders.
the feedback received and practical
Corporate Insolvency Resolution (CIR)
experience of processes under execution.
process provided they are not wilful
To its credit, the Government has been
defaulters—big relief to MSMEs
willing to hear out suggestions. An
expert committee was constituted to
Pillars of IBC - Equality, transparency, resolution and pace
IBC is modelled towards maximisation efficient and impartial resolution and in the public domain provide the perfect
of value of assets, striking a balance ensuring a transparent and predictable opportunity to analyse the performance
between liquidation and reorganisation, insolvency law with incentives to gather of the NCLT as an institution.
ensuring equitable treatment of similarly and dispense information. The judicial
situated creditors, provision of timely, orders that are transparently available
Decoding the Code: Survey on Twenty One Months of IBC in India 7
All is not well…yet: Significant delays Dealing with contingent
ground realities in resolution: liabilities:
The IBC has been touted as the knight IBC has been widely acknowledged Most companies have varied pending
in shining armour to salvage the NPA as a beacon of hope for creditors who litigations—tax, statutory dues,
situation, accordingly, expectations from have, for years, been waiting for justice. government dues, labour litigation and
it have surged. Though much ground However, in most of the cases the other commercial disputes. Resolution
has been covered over last 21 months, threshold of 270 days has been breached applicants have less clarity on whether
there are certain concerns, which may because of procedural inefficiencies, and to what extent such dues will be
require attention. lack of infrastructure and other frivolous discharged as a part of CIRP. Contingent
matters. Not only does this jeopardise liabilities by nature cannot be reliably
the basic premise of resolution within estimated. Hence, it will be difficult
Lack of momentum from 270 days but also results in notional loss to value the company and it requires a
investor community: of interest income for lenders with every lot of risk analysis before presenting a
The M&A activity in the stressed assets day of delay. resolution plan.
space has not been complemented by the
much spoken enthusiasm of investors The matter of Lack of clarity in case of
and a conducive investment landscape.
Many investors are waiting on the
‘operational’ creditors: security charge on an asset:
side-lines to gauge the outcome of the As a part of the mandatory contents of A typical corporate debtor has multiple
settlement of big cases and evolution the resolution plan, operational creditors lenders with multiple charges spread
of IBC before investing. Furthermore, should get a share of the liquidation across various assets. IBC disregards
these modifications to IBC have not put value. However in most of the cases, since differential rights across the same
to rest certain looming issues, which the liquidation value is very low and is not asset class that lenders have funded
are of concern to investors relating to even sufficient to pay financial creditors, differentially. This results in conflicts
operations of plants in India following the value due to operational creditors amongst lenders with different levels
transfer of assets under the IBC, period stands at Nil. This is the major reason for of risk and hamper liquidity in the
of commitment towards the units and many ongoing cases filed by operational debt market.
expected timelines to close the allocation creditors, requesting the NCLT to pass the
No provisions to curtail number of
process. Certain sector-specific concerns order of their respective payments.
bids: It is well understood that though
with companies under the IBC may require
it is the mandate of the IBC to promote
intervention from the Government.
Single bidder—liquidation maximisation of the value of assets of a
v. resolution: company, it is often forgotten that the
Sectoral challenges: essence of time is equally important
In some cases companies have received and the resolution applicants often get
Sectors such as infrastructure and power only a single bidder’s interest, but caught at the helm of the lenders call for
are facing challenges due to uncertain lenders have been unable to approve re-bidding and revision of bids.
and unattractive tariffs or realisations, resolution plans as the bid values are
low plant load factors due to raw much lower than the liquidation value.
material uncertainty or lack of support Lenders have preferred the liquidation Alignment with other laws
from suppliers to whom amounts route—however, it is quite probable and exemptions:
are due. Hence, bidding interest and that the liquidation process will extend
resolution for some types of assets may The resolution plan needs to be aligned
for months and the value realised at
remain uncertain and accordingly, with all other laws in force at the time and
the end may further erode from current
lenders may appear keen on keeping the resolution applicant does not enjoy a
estimates considering rising operational
these assets out of the NCLT. lot of exemptions with respect to taking
costs and insufficient cash flows. Hence,
over the management of a company. For
there should be a framework to enable
example, there is no exemption in the
conclusive decision-making where at
Income Tax Act for payment of tax on
least one bid is on the table, even if the
book profit due to write-off of liabilities
perceived value creates higher haircuts.
under the resolution plan.
8 PwC
The road ahead SME resolution approach
Following are some key measures that Below INR 50 Crore
are on the anvil: • Banks to develop template resolution approached
• Set up empowered SME steering committee
Project Sashakt:
A high-level committee on restructuring Bank led resolution approach
stressed assets and creating more
value for public sector banks (PSBs) INR 50-500 Crore
has suggested a transparent market-
• Lead bank to implement resolution plan in 180 days
based solution with a focus on asset
• Independent screening committee to validate process in 30 days
turnaround to ensure job protection and
creation, i.e., Project Sashakt.
AMC/AIF led resolution approach
Project Sashakt sketches the resolution
of bad loans, depending on their size INR 500 Crore or more
and is designed to address bad loans and • PSB takes lead in setting up Asset Management Company
strengthen the credit capacity, credit • Assets will be put up for bidding
culture and portfolio of PSBs.
• AIF will raise funds from Institutional Investors
Cross border insolvency: Better future!!
IBC currently has provisions relating to IBC has instilled a sense of urgency will create a sense of transparency and
cross border insolvency but these are among all stakeholders to resolve spur investor confidence in the financials
not adequate to effectively deal with bad loans. The fear of losing control of banks while changing the way banks
many default cases. This does act as a over their companies has prompted do business. Increased prudence is
deterrent for attracting investments. A various promoters to settle or resolve expected in lending, and there is likely
draft bill is in progress and hopefully will their dues, which presents a huge to be improved diligence and appraisal
be enacted after due diligence. opportunity for investors. when funding large projects. At the
same time, the corporate entities too will
In the long run, IBC, Project Sashakt and need to be more cautious or attentive
Impact of RBI circular dated the RBI circular dated 12 February 2018 with loan covenants as the tolerance for
12 February 2018: will bring a good structural change that defaults is being lowered considerably.
could strengthen the banking system. It
In an effort to hasten the resolution of
bad loans, the RBI tightened its rules to
make banks identify and tackle any non-
payment of loans rapidly. Lenders will
identify incipient stress in loan accounts
immediately on default, by classifying
stressed assets as special mention
accounts (SMA). If the principal or
interest payment or any other amount is
wholly or partly overdue, the account
will be categorised as SMA-0 for one
to 30 days, SMA-1 for 31-60 days, and
SMA-2 for 61-90 days. Lenders will
be required to report defaults on a
weekly basis.
The regulation provides for a strict
180-day timeline for banks to agree on
a resolution plan in case of a default or
else refer the account for bankruptcy.
The 180-day deadline for the first
set of cases ends in the last week of
August 2018 and it will be interesting
to see the number of cases that are
mandated for insolvency.
Decoding the Code: Survey on Twenty One Months of IBC in India 9
Survey Results
The Insolvency and Bankruptcy Code (IBC or Code) was introduced with a
larger macroeconomic objectives at play such as solving the twin balance
problem, developing a robust corporate bond market, improving the credit
environment, and consequently, providing a fillip to India’s competitiveness as
a business destination. The new Code was designed to streamline corporate
insolvency resolution process, which among other things, prevents value
destruction if there is corporate distress.
The IBC has been in focus given the respite it promises to various stakeholders
and its ability to expeditiously resolve large amounts of NPA and debts. With
this backdrop, PwC conducted a detailed survey and interviewed various
stakeholders representing the Lender community, the Investor community and
the Legal fraternity.
Survey methodology adopted:
Senior management of companies active in IBC participated in our survey.
The survey responses were obtained either through an online questionnaire or
detailed interviews conducted with the respondents. The survey respondents,
who had first-hand knowledge of the challenges and issues faced on the
management of stressed assets, took out valuable time to share their
experiences and knowledge about the Code.
The survey respondents were a mix of CFOs, Tax Directors, Strategy, Finance
and Legal professionals, Private Equity funds, Asset reconstruction companies,
Investment Bankers and Bankers of companies across various industries who
are actively involved in the IBC process.
10 PwCThe Investors’ Perspective
PwC conducted a detailed survey among The enactment of the IBC has caught were of the view that the introduction
private equity funds, asset reconstruction the attention of domestic and foreign of IBC is the most favourable recent
companies and strategic investors, both investors who are now looking at the amendment in the tax and regulatory
in India and abroad—to collate investor distressed asset space in a new light. An laws aiding investments in the Indian
perspectives. astounding 83% of survey participants distressed asset space.
Stressed assets: big, actionable and lucrative
Around 60% of respondents said that significantly above the average M&A deal
they are likely to allocate more than 100 size over the last decade (see Figure 1.1).
million US$ to distressed deals—which is
Figure 1.1 – How much funding will you allocate to distressed assets?
8% 31% 31% 23% 7%
None Up to US $ 100 to US $ 500 million to Above US $ 1 billion
US $100 million 500 million US $ 1 billion
Opportunities: actionable
and attractive?
One in every five participants believed
that, of all the distressed deal
opportunities that they evaluated in
the last year, more than 25% deals
represented an actionable and attractive
investment opportunity; however, a
majority of investors were very choosy
about actionable deals and believed
that only 10% of all the deals that
they evaluated were investible ideas.
However, investors across every group
expect IRRs in the range of 20-25% on
their distressed asset investments.
Decoding the Code: Survey on Twenty One Months of IBC in India 11Sector biases
More than 80% of investors surveyed sector—spanning industries such as the investors surveyed also evaluated
by PwC had a significant bias towards metals, chemicals, pharma, cement and deals in the infrastructure, power and
distressed deals in the manufacturing discrete manufacturing. More than half real estate sectors (see Figure 1.2).
Figure 1.2 – What would be your preferred sectors for distressed deals?
83% 83% 58% 58% 50% 33%
Manufacturing Metals Power Real Estate Infrastructure Chemicals
The dream: turnaround potential
More than half of the survey respondents
Figure 1.3 – What are your key reasons for investing in distressed deals?
cited turnaround potential as the key
reason why distressed deals were of
interest to them—indicating their belief
in either positive macro-economic
tailwinds or their ability to influence
better performance for their investee 55% 9% 18% 18%
companies (see Figure 1.3). The
sheer scale of the opportunity and the
opportunity to make high returns were
also cited by investors. Turnaround potential Favourable regulatory Attractive valuations Other
and tax regime
Vehicle of choice: asset reconstruction company (ARC)
More than two-thirds of investors
Figure 1.4 – What is your preferred vehicle for investing in distressed assets?
prefer the ARC route for distressed
asset investments (see Figure 1.4). This
further underlines the importance and
effectiveness of the ARC as an investment
vehicle, since it is the only vehicle, which
can acquire loans on a secondary basis in 67% 16% 17%
an efficient manner.
It will also be important to note that
the survey was conducted after the
introduction of Foreign Portfolio Investor Asset Reconstruction Alternative Investment Foreign Portfolio
(FPI) concentration norms. These may Company (ARC) Fund (AIF) Investor (FPI)
have resulted in a reduced preference
for FPIs as a vehicle for investing in
Indian distressed assets (through
Bond investment).
12 PwCInvestment challenges
According to our survey results, Figure 1.5 – What are your biggest challenges
45% of participants believe that the when investing in distressed assets?
top challenge for distressed asset
investments is the uncertainty in legal
processes (see Figure 1.5). In the 20
months since the IBC has become
effective, there have been a plethora of
amendments including an ordinance to 45% 27%
make changes to the original law.
Furthermore, there was a complete
overhaul in the framework prescribed Uncertainty of Regulatory and
for banks in dealing with stressed assets. legal process tax framework
The frequency of such changes and the
magnitude of their impact are a major
concern for investors.
Interestingly, valuation mismatch was 9% 18%
of least concern, and investors are
flexible when seeking to consummate a
transaction, provided the deal opportunity
shows sound return potential. Stretched timelines for Valuation
set up of platform and mismatch
finalisation of deals
Deep dive: legal and regulatory investment challenges
Around 60% of investors cited the Investors also noted the following • Thin capitalisation rules - for related
introduction of concentration norms factors as impairments to distressed party debt under Indian income tax
for FPIs as the biggest tax or regulatory asset investments: laws. The provisions of the Income tax
concern for distressed investments laws provide an exemption to banks
• Section 29A in the IBC - pertaining to
(see Figure 1.6). and insurance companies from the
the eligibility criteria for bidders. This
applicability of thin capitalisation rules.
The Government and regulators should also impacts Indian borrowers, who
However, ARCs - who become lenders
take note of this particular concern, may be deemed as related parties,
pursuant to the acquisition of loans -
given the importance of attracting by virtue of the quantum of debt
are not exempted from these provisions
foreign investment in resolving the investment in the books of the borrower
distressed assets issue.
Other significant concerns raised by
Figure 1.6 – What is the biggest tax/regulatory hurdle that will impact distressed asset investments?
investors, regarding Income tax laws, were:
• The applicability of Minimum Alternate
Tax (MAT) on the write-back of loans
• The inheritance of past tax liabilities
58% 8% 17% 17% of the borrower
When asked about what they would
like to change most about the current
tax or regulatory guidelines, 80% of
Foreign Portfolio Thin capitalisation rules Introduction of Revised framework for participants picked the non-applicability
Investors for related party debt section 29A in resolution of stressed of the provisions of Section 50CA and
concentration norms under Income-Tax Act IBC (regarding assets by banks Section 56(2)(x) of the income tax law,
for investment in bidders) (introduced in which deal with taxability of shares /
corporate bonds February 2018)
assets at a price negotiated below the
fair value (as per income tax norms).
This is relevant to acquisitions made
under Resolution Plan. Participants also
desired waiver of stamp duty on the
acquisition of the borrower entity.
Decoding the Code: Survey on Twenty One Months of IBC in India 13Restructuring challenges
Unlike the investment phase, where
legal, tax and regulatory hurdles were Figure 1.7 - What are your biggest challenges when restructuring distressed assets?
cited by respondents as their biggest
challenges, for actual restructuring
efforts, indecisiveness of creditors,
legal wrangles and non-cooperation of
promoters have been flagged as biggest
obstacles (see Figure 1.7).
37% 18% 27%
37% of the participants found that
the indecisiveness of banks and other
creditors was the key obstacle in
restructuring efforts. It could be a
good feedback for creditors as well as
Indecisiveness of banks Delays due to Obstructions / delays
legislators to take note of these concerns
and other creditors legal process by promoters
voiced by the investor community. It
will be useful to have a more conducive
environment for banks and other
lenders to give them requisite space
and authority to take relevant decisions
concerning NPAs in a flexible manner.
Furthermore, though IBC has been 9% 9%
introduced as a law with time-bound
resolution, one needs to work around
delays on the ground to ensure
that the legal system does not lose
its effectiveness. Regulatory approvals / conditions Availability of experienced
for closing of deal resolution professionals
Well begun is half done, but…
The introduction of IBC has opportunities for investors and a relate to legal, tax and regulatory
revolutionised the way in which warning to defaulting borrowers that bottlenecks, inflexibility of creditors
investors, creditors and borrowers they can no longer act with impunity. and non-cooperation of promoters. The
interact with each other. It promises Government has more work to do on
However, there are several challenges
a transparent means to creditors to these counts, if it expects to accelerate
that need to be ironed out if investments
recover dues, sizeable and high-return the resolution of this debt debacle.
are to be catalysed. These issues
14 PwCThe Lenders’ Perspective
The IBC brings about a paradigm shift in A survey was undertaken on IBC to
the resolution process by introducing the gauge the responses of bank officials
concept of ‘creditor in control’ instead of between 1 April 2018 and 30 June
‘debtor in possession’. This encourages 2018 (Survey Period). However, some
value enhancement of the corporate of the survey questions have already
debtor, since once the process starts, the been addressed by amendments to
board cedes control of the company, and IBC after the launch of the survey.
insolvency professional, with the help of Nevertheless, the survey responses
professional advisors, starts managing provide some interesting perspectives
the company. It is very essential to on the lenders’ outlook.
understand how lenders perceive IBC,
given that in a way they primarily
drive the process.
IBC: preferred resolution mechanism to recover dues
More than two-thirds of lenders (see The RBI, on 12 February 2018,
Figure 2.1) preferred a resolution ordered lenders to initiate bankruptcy
through IBC for recovery of dues, since proceedings within 180 days of default
it balances their twin objectives of on a single payment. Defaulting
enhancing recovery and turnaround promoters have to find ways to bring in
time. The remaining one-third indicated more capital; else, they face insolvency
their preference for mechanisms proceedings. This may have resurrected
other than IBC, i.e., sale to ARC and ARCs, which buy NPAs from financial
restructuring of debt. institutions at a discount to book value
and clean up their balance sheets. While
Asset Reconstruction Companies
guidelines under the recently launched
(ARCs), created under the ambit of the
‘Project Sashakt’ is awaited, lenders will
Securitisation and Reconstruction of
be able to transfer NPAs onto the books
Financial Assets and Enforcement of
of the AMC immediately, and ARCs will
Security Interest (SARFAESI) Act, 2002,
have the opportunity to revive the asset.
aimed to bring about a system to unlock
Hence, these mechanisms could, in the
value from stressed loans of banks
near future become credible aveneues
and financial institutions are a distinct
for banks to recover dues through sale to
second. ARCs were expected to act as
ARCs and restructuring of debt.
debt aggregators, with the objective to
acquire non-performing loans from the It must be noted that during the Survey
banking system, and putting them on a Period, the guidelines of Project Sashakt
path of resolution. However, the actual were not announced and the banks were
journey of ARCs deviated considerably at nascent stages of complying with the
from the envisaged path. RBI circular dated 12 February 2018.
Figure 2.1 –Preferred resolution mechanism to recover dues
69% 16% 15%
Resolution through IBC Sale to ARCs Restructuring of debt
Source: PwC Lenders Survey)
Decoding the Code: Survey on Twenty One Months of IBC in India 15Financial creditors: most disadvantageous position under IBC ?
Majority of the respondents are of the
Figure 2.2 – Most disadvantegous class under IBC
view that financial creditors are at the
most disadvanteous position under IBC
given the uncertainty around when a
resolution will ultimately be reached
(refer Figure 2.2).
Considering that the repondents were 37% 17% 13%
lenders themselves and they have
indicated that IBC is their best bet to get
resolution to their stressed portfolio, this
is an interesting outcome, and it appears
that this result is based on the ‘recovery’ Financial creditors Operational creditors Employees
achieved on some of the earlier
insolvency cases, where they have had to
take very deep hair cuts. However, it may
be comforting to note that irresepctive of
the results of this survey, banks continue 8% 25%
to believe that the IBC is the preferred
resolution mechanism (Figure 2.1).
Statutory Dues Workmen (labourers)
Source: PwC Lenders Survey
Resolution professionals: can do better
Among our survey respondents, 58%
Figure 2.3 – Appraisal of Resolutional Professionals
felt that resolution professionals need
improvement in managing business
affairs during the CIRP process
(see Figure 2.3).
The role of insolvency resolution
professionals, and their ability to 27% 58% 11% 4%
handle day-to-day affairs of bankrupt
companies, has come under the spotlight
with the NCLT questioning their
decision-making power recently in some Well equipped Need improvement Can manage temporarily No response
high-profile insolvency cases. However, it
should be acknowledged that the law is Source: PwC Lenders Survey
new and is undergoing constant changes,
which makes the role of insolvency
professional quite challenging.
16 PwCResolution professionals are the challenges they face include lack of in India are not empowered by law.
fulcrum of the IBC framework. They cooperation from the promoters and IBC is a test of the collective resilience
assume various roles, given that at times lenders, difficulty in running and maturity of creditors, debtors,
they are in charge of managing the the company given that quite often professionals and regulators combined.
corporate debtor as a going concern and particularly at the beginning the It is expected that the outlook towards
and are accountable to the CoC and the operational teams are not supportive a resolutional professional may change
adjudicating authority for their actions. and the regulatory framework in which over a period of time.Moreover, the
The responsibility to take the right they have to work evolving continuously. experience they would have gained over
decision in the interest and welfare of Unlike certain other countries such the last year and a half is expected help
all stakeholders rests with them. The as the UK, resolutional professionals the profession in the future.
Core sectors expected to continue dominating NCLT
Majority of lenders are of the view are likely to evidence maximum number
that Engineering, Procurement and of filings before NCLT for insolvency in
Construction (EPC) and power sectors the near future (see Figure 2.4).
Figure 2.4 – Sectors likely to evidence significant number of cases before IBC
48% 22% 15% 15%
EPC Thermal Power producers Pharmaceuticals Telecom
Source: PwC Lenders Survey
The cases before the NCLT as on May 2018 are dominated by two sectors—metals
and EPC (see Figure 2.5).
Figure 2.5 – Sector –wise snapshot of cases before NCLT as on May 2018 (Amounts in INR ‘000 Cr)
123 81 61 57 56 43 40 34 28 27 26 26 24 23 23 19 13 11 10 3 1
154
63
48 50
43 41
28
23 27 7 4 19 4 6
11 8 11 17 13 4 2 11 3 12 18 6 9 2 4 0 1 10 2 3 1 2 0 0 4 2 0 0
als in
g n CG ile
s s ia in
g
at
e rts er es lity rin
g ts n a re in
g al ne
s
et ur ct
io xt Ga ed ad st pa ow vic ta ee uc ta
tio ar
m ca ail Co rli
M ac
t
tru FM Te il &
M Tr E to P r i n ro
d
or Ph alt
h t Ai
uf y, al y/ Se sp gi Re
ns ,O lo
g ale Re Au er
g
na
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P
ns
p He
an Co ls o es o/ p a
M & ica hn ol Au
t En sio Pa Tr
fra em Te
c h es
W of
In Ch Pr
Revenue Debt No of companies
(Sorce : Eight Capital Advisory, VCCCircle)
This also raises the relevance of promoters are likely to continue to
pre-insolvency schemes such as the be a part of the company and could
Samadhan scheme (especially relevant well retain a management hold over
for the power sector)—wherein the company.
Decoding the Code: Survey on Twenty One Months of IBC in India 17Operational creditors are not welcome
to take decisions
85% of our survey respondents believe The IBC currently states that the
that major operational creditors resolutional professional will give
should not be included in decision notice of each meeting of the CoC
making (in the form of voting rights) to operational creditors, or their
in the Committee of Creditors (CoC) representatives, if the amount of their
(see Figure 2.6). aggregate dues is not less than 10% of
the debt. It also states that representative
Figure 2.6 - Should major operational creditors of operational creditors may attend
be included in decision making in the CoC? meetings of the CoC but will not have
any voting rights. The NCLT, however, in
one of the cases, permitted operational
creditors with debt lower than 10% to
participate in the CoC.
As the constituents of our survey
15% were lenders, it is not surprising to
find that a majority of them felt that
operational creditors should not be
included in decision making in the CoC.
Yes
In the UK, all creditors (except secured
creditors to the extent of the value of
their security), including operational
(trade) creditors, have voting power
in the CoC, in the ratio of the amount
outstanding—particularly for the
85% approval of a resolution plan. However,
in India, only financial creditors (secured
or unsecured) can vote in a CoC. The
opertaional creditors, are eligible for a
No proportion of the ‘liquidation value due
to them ’, what they get depends on the
Source: PwC Lenders Survey) approved resolution plan.
Expression of Interest (EOI): preferred
method of bidding
The EOI invitation is the most preferred bidding method according to survey
respondents followed by open auction and swiss challenge method (see Figure 2.7).
Figure 2.7 – Preferred bidding method
62% 10% 28%
EOI invitation Swiss challenge method Open auction
(Source: PwC Lenders Survey)
18 PwCThis assumes significance given recent bidders, including the H1 bidder, to ‘Swiss Challenge’ method will make the
proceedings related to a cement place counter-bids in the second round insolvency resolution process under the
company, where a bidder offered to of bidding. The stressed asset will go to IBC more transparent. It can potentially
increase its bid after another bidder was the highest bidder in the second round. also help banks realise more value
declared as a top bidder. If no other bidder is able to better the from the bidding process and possibly
H1 bid, the top bidder in the first round reduce litigation.
Under the ‘Swiss Challenge’ method,
is declared the successful bidder. A
the highest (H1) bid in the first round
few lenders are of the opinion that the
of bidding becomes the base price for
Bidders should be No requirement for A ray of hope
allowed to improve differential framework The IBC has become the preferred route
of resolution for creditors. Also, the
their offers for small companies rate at which applications for resolution
Interestingly, survey results indicate that According to our survey results, 54% of are either being accepted or rejected is
54% of respondents are of the view that respondents feel that there should not be commendable as it encourages more
the law should not restrict bidders from a differentiated framework for Small and and more creditors to take this route for
improving their financial offers (see Medium Enterprise (SMEs) or Micro, efficient NPA resolution. While the IBC
Figure 2.8). Small and Medium Enterprises (MSMEs) has provided creditors with a new tool to
(see Figure 2.9). manage their relationship with debtors,
its impact on improving the future credit
Figure 2.8 - Should the law restrict bidders’ Figure 2.9 - Should there be a scenario in India and on avoiding bad
ability to continuously improve their financial differentiated framework for debts going forward is yet untested.
offers till the last bidder remains in the fray? SMEs or MSMEs?
Though the RBI circular of February
12, 2018 and Project Sashakt should be
enablers for identification of stress at an
early stage and resolution outside of IBC.
Given that it is a nascent law the initial
46% hiccups are anticipated, hopefully it will
46% evolve over a period of time and provide
the much needed overhaul to the NPA
situation in India.
Yes
Yes
54% 54%
No
No
Source: PwC Lenders Survey Source: PwC Lenders Survey
The law currently does not curtail The key question is that whether one
a bidder from improving his offer. code or framework is sufficient to cater
Furthermore, the NCLAT in one of the to all size of businesses. The issue has
cases has directed the CoC to consider been addressed through an amendment
upward revised offers. made post the launch of the survey.
According to a recent amendment,
IBC is a fairly new legislation, and it has
MSME promoters will be allowed to
been continually evolving. However,
bid for their companies should they be
stakeholders should not lose the
put through the Corporate Insolvency
sight of its spirit and purpose. Value
Process (CIR) process, provided they
maximisation is a key driver, but at
are not willfil defaulters. Hence, an
the same time it is important that the
exception has been made.
resolution takes place in a timely manner
and the asset quality does not deteriorate The survey reponses, in this case, are not
over a prolonged resolution process. in consonance with the amendment.
Decoding the Code: Survey on Twenty One Months of IBC in India 19The Legal Tangle
IBC has been plagued by a number of legal issues
There are seven key issues of relevance here:
Sr. No Area Reason for lack of clarity Current status
1 Right of • In the case of insolvency proceedings against the Jaypee • The Insolvency and Bankruptcy Code
customer or Group, the amount owed by the Group to the home buyers (Amendment) Ordinance, 2018 (‘Ordinance’)
depositor as was much higher than those to financial creditors. recognises the ‘home-buyer’ as a financial
creditor creditor for initiating the corporate insolvency
• However, in the resolution plan, the financial creditors were resolution process against fraudulent or defaulting
given 1.6 times higher weightage than customers. real estate developers.
• The Code allows only a financial creditor to initiate corporate • Therefore, the Ordinance now enables home
insolvency resolution proceedings. buyers to represent themselves in the Committee
• Although the term ‘financial creditors’ is defined under the of Creditors—giving them a fair chance of
Code, there is not much clarity about the inclusion of ‘home- receiving repayment of their investments.
buyer’ in the definition.
2 Nexus or • Section 29A of the Code provides for persons ineligible to be • The Ordinance has now defined ‘relatives’ and
related party’s resolution applicants. ‘related party’ in relation to individuals who have
right to bid run a stressed business, covering relatives leading
• Earlier, it defined ‘related party’ only in the context of a up to fourth generation of an individual.
corporate. It was silent on related party and relatives in
context of individual or promoters, giving rise to ambiguities • This widens the scope of persons who will be
and litigations. barred from bidding for stressed business.
• Furthermore, as a result of section 29A, even genuine • Furthermore, the Ordinance has also made a
investors (e.g., stressed asset funds) were getting carve out for pure play financial entities, which are
disqualified from bidding. not related to the Corporate Debtor.
3 Regulatory • The definition of operational creditor and financial creditor • The Insolvency Law Committee* in its
dues - which does not make it very clear whether payments to be made to recommendations has stated that regulatory dues
class of statutory authorities would fall under which bucket. need not form part of operational debt. At the
creditor same time, it may be difficult to treat the same as
financial debt.
• Hence, the same remains unclear to that extent.
4 Decision • Decisions taken by the CoC could be taken only if 75% of • The Ordinance prescribes that decisions
making the CoC voted in favour. of the CoC will be passed if 66% of the
required by CoC vote in favour.
lenders - is • Although the provision was intentioned to ensure
75% too high acceptability of action, in effect, it led to a lot of logjam over
approval of resolution plans and also in routine decisions.
5 Application of • Application of the Limitation Act to the proceedings under • The Ordinance has inserted section 238A in the
Limitation Act the Code was not mentioned in the Code. Code whereby it has been clarified that provisions
on insolvency of the Limitation Act should apply to proceedings
proceedings • This led to a lot of hardship in enforcing one’s debt—if the under the NCLT, NCLAT, DRT or DRAT, as the
debts have become time barred. case may be.
6 Liability of • In the absence of a specific provision to the contrary, the • The Ordinance has amended subsection 3 of
guarantor guarantors of the corporate debtor sought to seek benefit of section 14 of the Code by specifically stating
the moratorium applied under section 14 of the Code when that the moratorium under section 14(1) of the
the insolvency petition was admitted against the corporate Code will not apply to guarantors of the corporate
debtor. debtor.
7 Non alignment • Provisions of SEBI laws, Income Tax laws, Companies Act, • By way of various amendments, the Government
of other 2013 were not in consonance with the Code. is trying to align other laws with the Code.
regulatory
laws with the • Hence, there were ambiguities on how a transaction will
Code be treated under the tax laws (for instance change in
shareholding beyond 49%), SEBI laws (trigger an open offer
on acquisition of a listed company admitted under the Code)
etc.
*Report of the Insolvency Law Committee dated March 2018
20 PwCLegal wrangles persist
PwC also conducted structured India (Insolvency Resolution Process for
discussions and a survey with law Corporate Persons) (Third Amendment)
firms—to collate legal and regulatory Regulations, 2018 (‘Rules’), has
perspectives and issues relevant to IBC. addressed both these issues by providing
that home buyers will be treated as
Two of the key outstanding issues
financial creditors to initiate a corporate
were the treatment of home buyers
insolvency resolution process, give
and related party rights to bid. The
relaxations to certain classes of related
Ordinance dated 6 June 2018, read with
parties and pure play financial entities.
the Insolvency and Bankruptcy Board of
There are, however, several issues that are still outstanding, such as:
1. Out of court settlements 2. High value bids submitted after 3. Conditions precedent
the deadline
In the case of Binani Cement Limited For acquisitions or the takeover of any
(BCL), a consortium led by the Dalmia In the case of Bhushan Power and Steel business, a host of regulatory approvals
Bharat Group, emerged as the highest Limited, Liberty House submitted the are required. While the Code provides
bidder. UltraTech Cement Limited bid after the deadline for submission that the Resolution Applicant will
entered an agreement with Binani as per Process Document had expired. acquire control over the corporate debtor
Industries Limited (BIL), the parent of The CoC rejected the bid. However, on approval of the Resolution Plan, other
BCL, wherein UltraTech agreed to buy Liberty House then challenged the CoC’s regulatory laws prevalent in India— such
BIL’s 98.43% in BCL in an event that decision to reject its bid on the grounds as SEBI laws or Competition Act, 2002—
insolvency proceedings were terminated. of late submission. Later, the NCLT asked were not aligned with the provisions
Such an agreement between Ultratech lenders to consider Liberty House’s bid, of the Code. As a result of this ‘non-
and the promoters of BCL raised stating bids could only be rejected on alignment’ between the Code and other
following questions on the sanctity substantive grounds, and not due to laws, Resolution Plans submitted to
of the Code: internal timelines. Tata Steel, seen as the NCLT contained certain ‘conditions
the highest bidder for the Resolution, precedent’ such as potential waivers of
• Can an application once admitted
then moved the NCLAT challenging the stamp duty, approval of the Competition
under the Code be terminated?
NCLT’s order. The matter is on-going and Commission of India and approvals of
• If yes, then who has the power the NCLAT has allowed all 3 bidders, i.e., other specific sector regulators.
to terminate the proceedings Tata Steel, Liberty House and JSW Steel
While some resolution cases have
under the Code? to file revised offers.
accepted such conditions precedent,
Strong objections were raised by both While the recent Ordinance resolved others have not. A key question that
parties, and accordingly the Government various issues, this specific issue remains—in an event where a resolution
took adequate steps and amended has escaped the attention of the plan is approved by the NCLT, with
the Code by way of the Ordinance. Government. There is still no clarity on conditions precedent, and subsequently
Section 12A of the Code provides that whether such late bids can be submitted these conditions precedent cannot
the adjudicating authority (that is, or not. This leads to several outstanding be fulfilled, what happens to such a
NCLT) may allow the withdrawal of an questions, such as: resolution plan? While till date there has
application admitted under Section 7 or been no such case, it will be better for
• What will be the long-term impact if
Section 9 or Section 10 (i.e., initiation of the Government to clarify on this point
bids are allowed to be submitted after
corporate insolvency resolution process to avoid litigation in future.
the deadline?
by financial creditor, operational creditor
PwC’s survey findings indicate that
and corporate applicant, respectively) • Is bidding for companies under the
out-of-court settlements and evaluation
of the Code, on an application made Code soon going to be based on the
of higher bids submitted after the
by the applicant, with the approval of Swiss Challenge method?
deadline were major obstructions
90% voting share of the Committee of
in the implementation of the Code.
Creditors, in such manner as may be
Furthermore, exemptions and waivers
prescribed. Furthermore, an application
sought in the resolution plan are
for withdrawal can be submitted only
generally not being given, and the
before the issue of an invitation for
resolution applicant or corporate debtor
expression of interest. This is a welcome
is being subject to undue hardships.
move, which will help facilitate out-of-
Moreover, in some cases, the NCLT is
court settlements for several disputes.
directing modifications to be made in the
relief section of the resolution plan, and
there are instances where the NCLT is
going into the commercial and business
decisions in resolution plans. This may
lead to further hardship for potential
bidders, thereby, discouraging them
from bidding in the first place.
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