Lenders prefer outside IBC biz rescue: Experts
Premium- IBC is seen as the last option when other turnaround options have failed
NEW DELHI : Lenders and corporate restructuring experts are increasingly choosing to rescue companies outside the Insolvency and Bankruptcy Code (IBC) without the judicial delays and huge haircuts they are forced to take once a company goes into formal bankruptcy resolution, according to experts.
The preference for investors and lenders to deal with industrial stress out of bankruptcy tribunals shows that the IBC is increasingly seen as the last option—when other corporate turnaround options have not worked out. A Reserve Bank of India (RBI) scheme rolled out in 2019 has accelerated the trend, experts said. This also reflects in the absence of a surge in bankruptcy cases after the one-year suspension of creditor action against corporate defaulters was lifted last March, said experts.
“The IBC is not a panacea for all. It is a long-drawn process; hence many lenders and investors are actively backing corporate restructuring outside the IBC for a quicker and smoother resolution of issues. Many believe that under a few special situations, providing financial backing to a distressed company under new management could be a better choice than taking it to the bankruptcy tribunal and having to deal with delays and haircuts," said Nirmal Gangwal, managing partner, Brescon & Allied Partners LLP, which specializes in handling businesses in distress.
“The June 2019 circular of RBI is a well-received alternative to the IBC for the restructuring process," said Gangwal. The Central Bank had provided a stressed asset resolution framework on 7 June 2019.
To be sure, the IBC has helped reduce stress in India’s banking system, with several large cases getting resolved under the tribunal monitored process. RBI data showed that gross non-performing assets of scheduled commercial banks have declined from ₹9.3 trillion as of the end of March 2019 to ₹8 trillion as of July 2021.
Brescon has, in the past few years, engaged in four corporate turnaround transactions in which a solution was achieved outside the National Company Law Tribunal (NCLT) framework. Out of those, financial capital was raised in two cases aggregating around ₹4,000 crore and restructuring under the RBI guidelines for the others totalling a debt size of around ₹7,000 crore, Gangwal said.
In a recent example of successful, out-of-IBC restructure, Jain Irrigation Systems Ltd, a listed company, informed stock exchanges on 12 February of approval of a restructuring plan with lenders and, subsequently, of allotment of equity shares to lenders. Experts pointed out that the execution of quick turnaround ensures financial benefits to all stakeholders, including limited haircut and provisioning for lenders, an overall increase in market capitalization for the shareholders while retaining honest management and tax revenue to the exchequer.
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Shareholders and lenders prefer solutions such as refinancing and recapitalization in which new lenders or investors provide more flexibility to the company in terms of repayment, said Nikhil Shah, managing director, Alvarez & Marsal, who leads the turnaround and restructuring practice in India.
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