Realised value should not be compared with admitted claims to judge CIRP’s success: RBI
The banking regulator — Reserve Bank of India (RBI) – has said that a comparison of realised value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process under the Insolvency and Bankruptcy Code, 2016.
“In a public auction-based resolution model such as the IBC, the extent of haircut represents the discount the market demands for acquiring the stressed entity as a going concern. Since significant value destruction may have already happened in these assets, a comparison of realised value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process,” says the RBI in its report on Trend and Progress of Banking in India 2021-22.
The banking regulator says that the resolution value may be compared with the liquidation value of stressed assets.
RBI points out: “Data indicate that at end September 2022, in cases where the corporate insolvency resolution processes (CIRPs) were initiated by financial creditors (FCs), the realisation through the IBC was close to 201 per cent of the liquidation value.”
Noting that declining rates of recovery in comparison to their claims admitted through this mechanism has raised concerns, the apex bank says the rate of recovery is contingent on several factors, including the overall macroeconomic environment, perceived growth prospects of the entity and its sector, and the extent of erosion in the intrinsic value of the entity. It expressed hope that as a broad-based recovery gains traction, these factors are likely to turn favourable for financial resolution.
The report, while expressing concern over the time taken for admission of resolution application as well as the final resolution and liquidation has steadily increased, also points out the steps taken to address the issue.
“The Insolvency and Bankruptcy Board of India (IBBI) recently amended the CIRP regulations aimed at improving realised value, reducing delays in the process, enhancing efficiency of available time, and improving information availability,” it says.
The RBI also mentions in the report the performance-linked incentives introduced for insolvency professionals, which should help in maximising the realised value of stressed assets beyond their liquidation value, and in their timely resolution.
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