Lecture 1-2_1sept_final.pptx sssssssssss

ibc

1. Economic rationale of insolvency law

2. What matters the most to develop the economy?

3. Possible Solutions Geography Hypothesis: Weather, access to port etc Culture Hypothesis: lazy, informal vs formal Ignorance Hypothesis : ignorance of better policy etc All of these theories has flaws and don’t work

4. Solution It’s the institutions An Optimal mix between rules of government and free market; or Man-made political and economic institutions

5. Virtuous cycle vs Vicious circle Developed countries are wealthy because of ‘inclusive economic institutions. → The state is controlled by its citizens, rather than monopolized by a small elite. → It establish institutions and laws which work for the majority of people, rather than just working to benefit the rich.

6. Virtuous cycle vs Vicious circle Countries that adopt ‘ extractive economic institutions’ Benefits few people Short term gain Indulge in civil war and chaos Recipe for Failed State

7. Institutions vis-à-vis Prosperity Source: Acemoglu D. & Robinson J. (2012 Case I: North Korea vs South Korea

8. Case II: Rise of Botswana Source: World Bank (2019)

9. Case III: Story of Nauru – An Island Country in South Pacific

10. Case III: India’s experience Post Independence till 1990: Regulatory MRTP, FERA etc Post 1991 till 2014: SEBI, Competition Commission of India Post 2014: RERA, IBC

11. Insolvency law: A key institution

12. Opportunity cost for not having formal Insolvency regime Direct cost Opportunity cost factor income such as rental, interest payment from close or sick plants. Erosion of net worth for companies. Impact on living standard of stakeholders namely employees, operational creditors etc. Higher transaction cost such as litigations cost, Time value of money etc. Indirect Cost Loss of goodwill/ reputation of firm Disruption in forward and backward linkages. Risky financial sector: Rise in cost of credit and higher compliance cost Long term impact on customer base and market share

13. Bad Bank: A Bad alternative to IBC Concept Set up to buy the bad loans and other illiquid holdings of another financial institution. Banks holding significant non performing assets (NPAs) at will sell these holdings to the bad bank at market price. Critics Mere transfer of NPA Debtor and creditor relation : Status quo

14. Benefits of having formal Insolvency regime Bring transparency in debtor creditor relation : Where both will know the procedure and the distribution of assets that might take place in case of insolvency. Protection against Moral Hazard : Post-contract behaviour of debtor, who may have incentive to change his business to transfer wealth from creditors to himself (Miller, 1977). Threat of transfer of property right from debtor to creditor in case of bankruptcy will minimize the problem of Moral Hazard. Elimination of Incompetent Management : Most obvious reason for company to go into bankruptcy is because of incompetent Management. Shift of management from debtor in control to creditors in possession provides some protection and save cost associated with precautionary measures on part of creditors

15. Setting up of Formal Insolvency Regime Consolidation of all laws related to insolvency under one umbrella Accessing Transaction cost (Search cost, litigation cost, risk premium, Real saving of time) Emerging Jurisprudence (Market Feedback) Amendments to Insolvency Regime Boost Entrepreneurship Promote debtor creditor relation Protection against Moral Hazard Better contract enforcement Better Banking practices Lower cost of capital Rise in Private Investment Rise in profitability and expansion of corporation (ceteris paribus) Liquidation : Facilitate recycle of funds (time bound) Reduces Increases Boost Financial System No more endless wait for Bankers Better Banker – Debtor relation Lower cost of capital Speedy disposal and recovery Out of court settlement Upgradation of assets by Central Bank Idle scenario Stress Contribute to the economy such as Employment generation Stock market stability etc. Economic stress Early Resolving Formal CIRP Informal OOCS Resolved Rewiring Debtor – Creditor relationship Interdependence and evolution of Insolvency law, Debtor-Creditor relationship and the impact on the economy (Source: Naveen Bali, Working Paper)

16. Impact of IBC: Behavioral Change Out of Court Settlement As on 28 Feb 2019, 6079 cases* involving a total amount of Rs 2.84 lakh crores have been withdrawn before admission under provisions of IBC (Source: MCA). Further, as per RBI reports, Rs. 50,000 crore has been received by banks from previously non-performing accounts. RBI also reports that additional Rs. 50,000 crore has been "upgraded" from non-standard to standard assets. During CIRP 5 per cent of admitted cases (91 cases) have been withdrawn under Section 12A indicating an acceptable resolution being proposed by the corporate borrower. The overall recovery in case of resolved cases is ~ 43 per cent (INR 74,497 crores) to FCs. This is 194 per cent of the liquidation value (INR 38,443 crore). This realisation of 43 per cent of claims and 194 per cent of liquidation value is in addition to rescue of the defaulting CDs and preventing defaults. Out of the 94 CIRPs which ended with a resolution plan, the resolution plan for 65 cases was approved after 270 days. Liquidation As of March 2019, the CIRP for 378 companies ended in liquidation. The total claims on these liquidation cases are Rs 257,634 crore., of these, 283 companies were with BIFR or already defunct. * Cases withdrawn may not be equivalent to cases resolved. Further data was not available to drawn any conclusion

17. Impact of IBC: Behavioral Change Average recovery under various recovery regimes Overall recovery by FCs in resolved cases

18. Evaluating the Bankruptcy Law Regime Treatment of failed entrepreneurs Time to discharge Exemption of assets Prevention and streamlining Early warning mechanisms Pre-insolvency regimes Special procedures for SMEs

19. Evaluating the Bankruptcy Law Regime Restructuring tools Initiation of restructuring by creditors Length of stay on assets in restructuring Possibility and priority of new financing Possibility to "cram-down" on dissenting creditors Dismissal of management during restructuring Other factors (Degree of court involvement) Distinction between honest and fraudulent bankrupts Rights of employees

20. Evaluating the Bankruptcy Law Regime Source: OECD Framework

21. Source: Anjali et al, 2015

22. Source: Anjali et al, 2015

23. Source: Anjali et al, 2015

24. Q: Any efficient Insolvency Regime should resolve the case in a time-bound manner. Given the slow growth rate of economy, large pendency of cases stuck at CIRP as well as large number of cases ending up in liquidation, it seems that the economy at present is going in the opposite direction to the objectives that IBC was supposed to achieve. Do you feel setting up of IBC was justified, what is the future of IBC in the coming 5 years, relate your argument with the issues mentioned above.