RBI’s Das envisages framework for Group Insolvency Mechanism under IBC

Reserve Bank of India (RBI) governor Shaktikanta Das on Thursday envisaged a Group Insolvency Mechanism for better recovery of dues of creditors under the Insolvency & Bankruptcy Code (IBC) process. “Globally, there are two diverse facets of Group Insolvency. Some jurisdictions have adopted either procedural coordination or substantive consolidation.

Substantive consolidation pertains to the consolidation of assets, liabilities, and operations of multiple entities within a group, disregarding their separate legal entity status,” Mr. Das said while speaking at the CAFRAL Conference. “On the other hand, under procedural coordination, the approach is limited to aligning procedural aspects like filing requirements, timelines, coordination and not mingling the entities per se,” he said.

He said in the Indian context, in the absence of a specified framework, the group insolvency mechanism had been so far evolving under the guidance of the Courts. “Perhaps the time has come for laying down appropriate principles in this regard through legislative changes. There has been quite a bit of brainstorming on this issue in the policy circles for some time now.

The task now is to move forward through appropriate legal changes,” he emphasised. “While a legal framework cannot envisage all plausible real world scenarios, given the complicated group structures at the ground level including cross border linkages, it may be in the fitness of things to formally conceive a framework to start with,” he added.

“There would be challenges in this journey like intermingling of assets, devising a definition of a ‘Group’, addressing cross border aspects, etc. It would still be preferable to see the opportunity here and put in place a workable framework for group insolvency,” he added. Mr. Das also suggested for developing a vibrant secondary market for stressed assets.

“A robust secondary market in loans can be an important mechanism for management of credit exposures by the lending institutions,” he said. He said though the trend in recent years had been towards balancing the rights of Operational Creditors (OCs) with those of Financial Creditors (FCs) under the IBC, there needed to be some distinction in weightage attributed to different category of creditors, depending upon the degree of risk absorbed ab initio.

“It has to be recognised that the financial creditors take the maximum risk and hence their risk needs to be commensurately compensated and with priority. Accordingly, any amendments to the Code and its evolution thereof may continue to lay emphasis on a financial creditor led resolution framework, in an overarching manner,” Mr.

Das said. Raising serious concerns on the delay in resolutions under the IBC, Mr. Das said as of September 2023, 67% of the ongoing CIRP cases had already crossed the total timeline of 270 days including possible extension period of 90 days. “More concerning is the fact that, the average time taken for admission of a case during FY 2020 21 and FY 2021 22 stood at 468 days and 650 days respectively.

Such long degree of delays will substantially erode the value of the assets,” he warned “There are a multitude of factors playing out here, namely, the evolving jurisprudence related to the Code; litigatory tactics adopted by some corporate debtors; lack of effective coordination among creditors; bottlenecks in the judicial infrastructure,” he added.

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