Bahram Vakil, the founding partner of leading law firm AZB & Partners, is reckoned among the country’s foremost infrastructure and project finance attorneys. He has worked on several committees that introduced major policy changes in the country. Among them are the U K Sinha Committee— working group on foreign investment in India; SEBI sub-group on regulatory guidelines for redeemable non – convertible preference shares, and the Viswanathan Committee on bankruptcy law reform. He also played a vital role in drafting the new Insolvency & Bankruptcy Code (IBC). In an exclusive interview with Free Press Journal’s R N Bhaskar, Vakil spoke on the status of the Bankruptcy Code in India.
Given below are edited excerpts:
As you are a co-author of the IBC, can you explain why this law became important?
There are three key issues for the law. First, obviously, the size of the NPAs (non-performing assets) had ballooned to such an extent that it was crying for a resolution. Sadly, the earlier law had become non-operational. So this was a crying need. So this law happened in a world record time of 13 months— from start to finish.
The second factor is not so well known. In the case of our equity markets, for a very long time we have been lamenting that our bond markets are pretty shallow. So many domestic and foreign bond investors felt if recovery is so inefficient, you cannot deepen the market. We cannot take all the credit. But in the 18 months if you look at how the bond markets have grown, we can say that this law has had some salutary effect.
The third issue is that SMEs (small and medium enterprises) account for 90 per cent of our employment, and over 80 per cent of our economy. Unfortunately, SMEs were not entertained (when it came to resolving bad debts). They were out of the banking system but now it is exactly the opposite. Anyone who has not been paid—even the security guard or any employee— can move against the party who has not paid. This new law has certainly strengthened their hand. Let’s face it, the idea was to do this.
All the RBI mandated restructurings of the past recovered around Rs 2,000 crore. Today, even though we are talking of two or more cases that have been resolved, we are talking about 100 times that number. Today your recovery rate is 75 paise to the rupee. Even the banks did not expect to get so much recovered.
Why did you bring in Section 29 (a) (of the IBC), perhaps the only debt recovery law in the world that has this provision?
This was something the government decided which is a very bold move. The reason for introducing it is very simple— moral hazard. The defaulting promoter should not take advantage of buying back the assets at lower prices.
At the same time for the SMEs, the banks believed that the promoter may be the only bidder. So if you have 29 (a) applied to SMEs, you are asking for tonnes of liquidation. To be very clear, I would say the goal of IBC is not liquidation, but resolution. Only if resolution is impossible, you go for liquidation. Only the big 12 or the big 40 are in our face every day, but we will have thousands and thousands of SMEs as well. So in the ordinance, there is a carve-out that 29 (a) would not apply to SMEs.
So does this mean that the IBC and the ordinance is the final shape of the law as it stands, or should it be considered as work-in-progress?
My personal view is that there is a continuous learning process with any new law. We are in the learning stages. So, if you see, we finished in the end of February 2018. One can see how much has happened in March, April and May. I think this will be a continuous process for at least two to three years. If you look at UK, the US or any of the countries, it is extremely similar.
Of the 12 cases announced by the RBI, there have been resolutions only in a couple of them. Why?
Please remember it is exactly a year—June 12 last year (when the RBI came out with its list). Saying only two resolutions have taken place is a bit unfair. The RBI circular was out on June 12, but the work began from the third week of July — the trigger date is admission. All these are massive cases even by world standards. You are talking of over $5-7 billion here which is very massive and complex at the same time.
In one case, Essar Steel, the court has asked for the clock to stop for 20 days. So we should leave it to the courts to decide whether the move to resolution is fair, or not fair. But if you ignore the litigation, almost six cases of the 12 cases are done.
I agreed that people will go to court against any new law. But the glass is more full than empty. Moreover, in many cases, the resolution amount is more than five times the amount that was offered earlier by way of settlement before this law came in.
I can also tell you that all the RBI mandated restructurings of the past recovered around Rs 2, 000 crore. Today, even though we are talking of two or more cases that have been resolved, we are talking about 100 times that number. All this within a time frame of 18 months. Today your recovery rate is 75 paise to the rupee. Even the banks did not expect to get so much recovered.
Recovery from steel companies was good because the industry cycle was on an upswing. But what about power companies?
Without a doubt, the timing was good for resolving steel companies’ debts. Fortune favours the brave. Power is a tougher one. But the principle is the same. I see lots of clients coming in specifically for distressed power assets. So for good assets, there is good appetite. People are willing to work on a good asset that has bad balance sheet. But if the asset itself is not good, why should anyone buy.
I agree, there will be challenges in the courts. But as a lawyer I can say that in the power sector there are issues that have been talked of for more than a decade— since 2004. How long can one say, be patient? This can go on forever. I think the time has come to call the shots.
The minute you make one exception, then the entire exercise is over. You will have 10 people outside the door crying that they also had a force majeure situation.
Why were home buyers treated as financial creditors instead of operational creditors? What was the reasoning?
That is a tough question. Right now the Code has operational and financial creditors. And we have differing judgements on whether home loans are operational, or financial or neither. They fall between the cracks. But it had to be dealt with. Here too we had to take a stand because of the Supreme Court case where there were 30,000 home buyers. It was an emotive issue as well. Now we had the question: should the home loan be financial or operational. If you are a financial creditor, you sit at the (negotiating) table. If you are an operational creditor, you don’t sit at the table. However, the home buyer is giving a cash in advance. So it is more of a financial creditor. There will be a trustee who will represent the interests of all the home buyers, and must listen to them individually and not collectively.
What is the status of the other companies apart from the first 12?
The remaining 24 were listed in January and many settlements are already taking place even before they went to the National Company Law Tribunal (NCLT). Section 29 (a) has actually pushed promoters to seek settlement before the matter reaches the NCLT.
There is a Bombay High Court judgment which says that NCLT cannot be applied retrospectively. Your views.
All I can say is that this is surprising. In fact there is a clause in the Code which says that if you have not complied with the provisions of the IBC, you have a 30-day window to do so.
Do you expect delays in the process to take place?
It all depends on the way the infrastructure is enhanced. We have already increased the number of tribunals to three. We will need at least five. Plus we have only one appellate tribunal. We may need at least two more.