Insolvency process: Parliamentary panel suggests benchmark for 'quantum of haircut'

A Parliamentary panel has suggested having a benchmark for the "quantum of haircut" in an insolvency process amid instances of financial creditors taking steep haircuts on their exposure to stressed companies.

Besides, the committee has pitched for measures to prevent protracted litigations with respect to an insolvency resolution process.

The Insolvency and Bankruptcy Code (IBC), which came into effect in 2016, provides for a market-linked and time-bound resolution of stressed assets.

Emphasising that the fundamental aim of the Code is to secure creditor rights which would lower borrowing costs as the risks decline, the panel said there is a need for greater clarity in purpose with regard to strengthening creditor rights through the mechanism devised in the Code.

The committee particularly mentioned about the "disproportionately large and unsustainable 'haircuts' taken by the financial creditors over the years".

In some insolvency resolution processes, the haircuts taken by creditors were more than 90 per cent.

"As the insolvency process has fairly matured now, there may be an imperative to have a benchmark for the quantum of 'haircut' comparable to global standards," it noted.

Generally, haircut refers to losses incurred by creditors on resolution of a stressed asset.

The suggestions have been made by the Standing Committee on Finance in its report on the 'Implementation of Insolvency and Bankruptcy Code - Pitfalls and Solutions'. The report was tabled in Parliament on Tuesday.

It is a matter of grave concern for the committee that the insolvency process has been stymied by long delays far beyond the statutory limits. It is disconcerting that even admission of cases in NCLT has been taking an unduly long time, which thus defeats the very purpose of the Code, the panel noted.

The committee also pointed out that there have been instances of frivolous appeals, which further drags the resolution/ recovery process leading to severe erosion of asset value.

The panel said it would therefore recommend that misuse/ abuse of well-intended provisions and processes should be prevented by ensuring an element of finality within the statutory stipulated period without protracted litigation.

There have been six amendments to the Code so far.

According to the committee, any legislative enactment and implementation need to constantly evolve to meet the challenges in the ever-changing ecosystem.

However, the panel said it is of the opinion that "the actual operationalisation of amendments made so far may have altered and even digressed from the basic design of the statute and given a different orientation to the Code not originally envisioned".

Further, the committee flagged that "the low recovery rates with haircuts as much as 95 per cent and the delay in resolution process with more than 71 per cent cases pending for more than 180 days clearly point towards a deviation from the original objectives of the Code intended by Parliament".