Acquisition of distressed assets has gone up in India since the implementation of the Insolvency and Bankruptcy Code. According to a report by Bain & Company, these acquisitions have accounted for 70% growth in deal value in 2018, compared to a year ago. The period between January 2015 and April 2019 has seen seven large distressed assets acquisitions, amounting to $23 billion (around Rs 1.62 lakh crore).
The IBC was enacted by the Centre in 2016 and provides a legal framework to resolve insolvency in a time-bound manner. The code had earlier set out a 270-day timeline for debt resolution. To further streamline the process, the IBC was amended in August to mandate that the entire insolvency process, including litigation and judicial proceeding, must now be completed within 330 days.
However, when compared with healthy assets the market response to acquisition of large distressed assets has been weak, the report said. Over a one-month period from announcement, deals involving distressed assets were received more favourably by markets than acquisitions of healthier assets, according to the report.
The trend reverses over a one-year time frame, with stocks of only 33% distressed assets outperforming the indices since the acquisition announcement. In comparison, stocks of 53% of the companies that acquired healthy assets outperformed the index in over a one-year period. This weaker long-term market response to distressed assets acquisition could be attributed to the niggling issues with India’s insolvency framework. According to the report, around 34% of all the open cases admitted under IBC remained unresolved past the earlier 270-day timeline. Of over 2,000 cases undergoing insolvency, only 120 were closed by resolution as on June 30. Of the total amount of claims admitted, only 42.8% (about Rs 1.08 lakh crore) was recovered through the resolution process.
The August amendments, which also clarifies on the hierarchy of secured and unsecured creditors, are expected to resolve IBC cases quicker, the report said. The amendments give the committee of creditors, typically consisting of the financial creditors of an insolvent company, the power to decide on distribution of funds.
These changes were reportedly prompted by the dispute between groups of creditors in the Essar Steel insolvency. Earlier this year, the National Company Law Appellate Tribunal ruled in the Essar Steel judgement that various classes of operational creditors should get treated equally. The order was then challenged in the SC by Essar Steel’s financial creditors.
Following the August amendments, the operational creditors to Essar Steel have moved the Supreme Court challenging the changes in the Act. Legal experts have apprehensions that despite the amendments, such disputes may continue to delay the resolution process.
“The insolvency process tends to go on longer because there are so many creditors to address in the larger cases. For instance, the dispute with operational creditors over the resolution of Monnet Ispat and Energy dragged on till August, 2019,” said a lawyer who worked on the JSW Steel and Monnet Ispat merger. The NCLT had approved the Aion Capital-JSW Steel consortium’s resolution plan for Monnet Ispat and Energy more than a year ago in July 2018.
The Bain report states that besides regulatory uncertainty, the limited financial information about distressed assets and the long lead-time to closure are among the key risks associated with the acquisition of these assets. The decay of assets due to the longer closure period also adds difficulty in continuing operations during and after resolution.
According to Bain & Company, one solution to the above issues would be to utilise the time between initiating insolvency to its completion to set out a clear road map to maintain operational continuity.
