With the onset of the Insolvency and Bankruptcy Code, 2016 (“Code”), much focus has shifted to distressed assets and opportunities in the same. As developed economies realize, there is a wealth of opportunity in the markets for distressed assets and have structures to optimize the same. India is still in a protective stage where the market for distressed assets is scattered with neither a coherent information platform, nor a way to inform investors regarding all aspects of the assets.
The scattered nature of stressed assets may be seen in
several avenues – (i) assignment of distressed loans by lenders to asset
reconstruction companies, (ii) sale of physical assets under the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 (“SARFAESI”), (iii)
resolution by means of a resolution plan under the provisions of the Code, (iv)
sale of assets under liquidation etc. All such avenues use a myriad of
marketing and technology platforms including the website of the Insolvency and
Bankruptcy Board of India (“Board”),
the website of National E-Governance Services Ltd (“NeSL”), MJunction Services Ltd, AuctionTiger.net, newspaper
advertisements, local dealerships etc.
Over time, the market for distressed assets has grown bigger
and more scattered. Every attempt to streamline the process ends up creating a
choice for a new process versus an old one, which results in further dispersion
of information. For example, in a typical auction for an assignment of a loan
account, the bid documents are only distributed to asset reconstruction
companies (“ARCs”) having an
‘agreement’ with the assignor lender. Such assignor, being typically a large
public sector bank, does not go out to explore the market for more financial
institutions but restricts the search to ARCs having an agreement with itself. Given
that information inadequacy omnipresent in all stressed asset cases, the ARCs
take their time while doing their due-diligence by when the assignors’ auction
process may be over. There is no single platform where the list of all such
loan accounts may be listed with basic details about them. Most such deals then
happen bilaterally rather than exploring the wider market. So while the process
may give an illusion of a ‘Swiss Challenge Method’ being followed, in practice
it is simply a negotiated deal. Even then, the cooperation of the original
management of the borrower is actively sought by the assignee to the debt in
order to effectively resolve the company. In most such cases, the assignee is
reduced to be a backdoor vehicle for the borrower to enter into a settlement
with its lender. And the entire process happens without any transparency or
regulation.
Similar inadequacies are faced in other processes of sale of
distressed assets as well. The reasons being lack of transparency and lack of a
coherent market for distressed assets. Time and again the government has tried
to implement systems to build such a system. The Board has enabled the listing
of all auctions under liquidation on its website and has encourages the use of
NeSL to conduct the auctions so that all such activities at least till the fold
of the Code may remain organized, and hence measurable. However, the Board made
no means available to convert the data into metrics. Further, the technology
platforms recommended turned out to be ineffective at the time of their launch
losing much confidence in the eyes of the stakeholders, who resorted to using
private platforms for their needs. Today, there are over 15 auction service
providers marketing themselves and rendering services to insolvency
professionals with no means of collating data amongst themselves.
Another major distressed asset in the country is in the form
of companies looking to be resolved. This happens both within the framework of
the Code and outside it. And is met with the highest level of customization
possible for distressed assets in the country. The resolution plans may be as simple
as refinancing or settlement via equity infusion to revive the corporate
debtor. Or may include parts of mergers and acquisition, dissolving parts of
the business, tax optimization, and refinancing using long-term debts which
themselves may run into stress in due course. In this scenario we realize why
stressed assets have customarily been a very disorganized space. Different
borrowers may require a variety of different solutions, which may not always be
available in the market. Of course the lack of information availability does
little to help standardize the process. But fact remains that there’re no
“standard solutions” when it comes to stressed assets.
The National Company Law Tribunal that acts as an
adjudicating authority for insolvency cases in India might be the greatest
repository of data for insolvency cases. All insolvency cases at some point
need to refer to the Adjudicating Authority for a variety of reasons and if not
for anything else, then at least for obtaining final orders on their cases.
Further, the Adjudicating Authority requires the insolvency professionals to
regularly report the progress of the cases, creating a large repository of
regularly updated information. However, all this information is never converted
into any knowledge due to the lack of any metrics. The information keeps
getting rusted into back alleys of old courtrooms (or in a modern sense, in
cloud storages). But no real value is ever derived out of them. It is no
surprise that the number of cases pending to be adjudicating before such forums
itself is an undefined number with no metrics for that as well. The judicial
system works without accountability, or worse – measurability.
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