The corporate insolvency process of Reliance Capital brings to the fore the glaring conflict between the twin principles of time-bound resolution and value maximization of resolutions which are enshrined in the Insolvency and Bankruptcy Code of India.
The case, which has already received three extensions, brings out the inefficiency in time management in the corporate insolvency resolution process. The committee of creditors has been incessantly pressing for a second round of auction in the high hope of getting an improved bid.
But it should be noted that for effective valuation the committee should focus on a time-bound resolution. That’s also because any further delays could lead to a steep depreciation in the value assets on the bloc.
In fact, if the principles of the bankruptcy code are to be scrutinised, it can be stated that the sanctity of timelines is of primary importance. That said it is also a fact that even though timelines might be adhered to, the decision finally rests with the lenders. Indeed, the paramount importance of the lender was also upheld by the Supreme Court in multiple judgements.
But, the authorisation of the apex court sours the timely process of resolution under IBC as the lenders continue, for material and sometimes marginal gain, to extend the process. Thus, if such delays are condoned or permitted, the sanctity of the code might be seriously compromised.
The Curious Case of Second-Round Auctions
Not only do the delays compromise the sanctity and efficiency of the code but also effectively undermine the entire process as they lead to questions about transparency.
Even after managing to gain an effective Rs 8,950 crore bid for the project, the RCAP lenders’ committee has voted for a second round of auction, which according to many is unnecessary and extending the process.
Note that delayed timelines of the process might deter more serious bidders who might not want to acquiesce to the whims of lenders or face any litigation on account of alleged procedural lapses.
As a matter of the fact, such a scenario has played out in the past when Oaktree had walked out of the bidding process for the company namely Dewan Housing Finance.
Sure, according to the lenders, they are deeply analysing the case for better service and profitability of different parties involved in a negotiation. Needless to say, the process needs to be comfortable, transparent, and reliable. But wasn’t it so in the first round of auctions too?
Such delays show the glaring inefficiencies that have seeped into the code, which at one point was considered the pioneer of change in the banking industry, both in perception and fact.
India’s insolvency code also is facing a setback compared to the insolvency process around the world as such processes in developed markets are defined in terms of clear parameters that are essential for a transparent structured process. This helps to convey confidence in the market and to maximise the value of the process. Currently, the high probabilities of breaches in confidentiality undermine certainty in the efficient process of insolvency. This is certainly discouraging good-faith bidders away from the process.
The code needs to be restructured to weed out the inefficiencies that have crept into the system as RCAP is not the first company to bear the burden of such inadequacies. The tweaks should define parameters more clearly to make the process transparent and just.
Sonam Chandwani is Managing Partner, KS Legal & Associates. Views are personal and do not represent the stand of this publication.
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