RBI Dy Governor finds several lacunae in working of Committee of Creditors

Reserve Bank of India (RBI) Deputy Governor M. Rajeshwar Rao emphasized the need for significant improvements in the functioning of the Committee of Creditors (CoC) within the Corporate Insolvency Resolution Process (CIRP).

Addressing a gathering at the International Conclave jointly organized by the Insolvency and Bankruptcy Board of India (IBBI) and INSOL India, Rao highlighted several areas where the CoC’s performance has been found wanting. These include:

• Prioritization Issues: Disproportionate emphasis on individual creditors’ interests rather than the collective interests of the group.
• Internal Disagreements: Conflicts among members of Committee of Creditors regarding resolution plans, often stemming from concerns over undervaluation or perceived lack of viability.
• Distribution Conflicts: Disputes over the allocation of proceeds even after the approval of a resolution plan.
• Non-Participation: Instances of members not attending CoC meetings or failing to engage effectively.
• Skill Gaps: Insufficient expertise in areas such as corporate finance, legislation, and industry-specific knowledge.
• Responsibility-Authority Mismatch: Financial creditors nominated to the Committee of Creditors being assigned responsibilities that surpass their actual authority.

“It is in the larger interest of the creditors that these issues are resolved internally by the CoC members themselves, without waiting for regulatory interventions,” Rao stated. However, he acknowledged that misaligned incentives often lead to deviations from best practices.

To address these challenges, Mr. Rao proposed the introduction of an enforceable code of conduct for the CoC. He emphasized that the diverse nature of financial creditors makes it challenging for sectoral regulators to ensure compliance. Instead, he suggested that the IBBI, as the designated regulator under the Insolvency and Bankruptcy Code (IBC), should be empowered to enforce norms governing the conduct of all stakeholders in the resolution process.

“The IBC assigns a central role to the CoC in the CIRP. Therefore, ensuring its effective functioning is critical to the success of the insolvency resolution framework in India,” he added.

Meanwhile, Rao also raised the issue of incentivising the resolution professional, who he believes are key stakeholder under the IBC ecosystem.

“While regulations have helped create an ecosystem for Resolution Professionals (RPs), their compensation should be determined by the market based on commercial considerations,” he says

He further says that managing a corporate debtor under insolvency proceedings requires specialized skills, and therefore, he thinks the market should develop compensation structures for RPs that are tied to the outcomes of the resolution process.

“This would address the principal-agent issue and align the RP’s goals with the CoC, maximizing value for both parties. It would also attract experienced professionals, benefiting the system as a whole,” he added.

Also See: Need for collaboration among stakeholders for effective restructuring: RBI Dy Governor