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The Reliance Capital (RCAP) case is yet another example of the corporate insolvency resolution process threatening to undermine the sanctity of the Insolvency and Bankruptcy Code. It looks set to follow the familiar path of endless extensions and litigation that we have seen earlier in the resolution cases of Binani Cement and Dewan Housing Finance Ltd.
In the latest development, the National Company Law Tribunal has refused to halt lenders to RCAP from voting for a second round of auctions after Torrent Investments, which had put the highest bid in the first round, appeal against it. It will hear the issue and pass a judgement on January 12. The upshot is that we could see further delays and litigation in a case that has already got three extensions. The latest deadline expires on January 31, 2023.
How did things come to such a pass?
Reliance Capital (RCAP) was the third major non-banking financial firm to be cherrypicked by the Reserve Bank of India (RBI) in November 2021 under IBC after Srei Group and Dewan Housing Finance Corp. Ltd (DHFL).
On December 21, 2022, Torrent Investments made the winning bid of Rs 8640 crore in the first round of auctions for RCAP’s assets. However, a day after the auction ended, the Hinduja Group made an improved offer of Rs 8,950 crore. Following an appeal by Torrent, the NCLY restrained the administrator of RCAP Nageswara Rao Y from presenting the non-compliant bid to the committee of lenders.
Three days later, however, the lenders in a meeting decided that the winning bid in the first round of auctions was sub-optimal and decided to hold another round of auctions.
It it goes against the spirit of the law, against one of the key principles of IBC—ensuring the resolutions take place in a time-bound manner.
To be sure, all the bids made so far have been below RCAP’s liquidation value of around Rs 12,500 crore. But that is the name of the game and lenders have to be prepared to take a haircut, since this has come about after a transparent auction and long resolution process. Endlessly waiting for an improved offer is not the answer.
Under the IBC originally, a bankruptcy case has to be closed within 180 days and a further 90 days extension can be given. Further, it was amended to allow 330 days in all since a case is admitted to the NCLT. However, this timeliness aspect has also been a crippling failure of the insolvency process.
The Jaypee Infratech insolvency, for instance, took five years to complete. Data from the Insolvency and Bankruptcy Board of India say that the 553 cases that were closed under IBC on an average took 561 days to close and the 1800 odd cases that went into liquidation took 437 days to attain closure.
The situation is not improving. There were 1947 insolvency cases before the tribunals as on 30 Sep 2022; eight out of every 10 are pending for at least 270 days.
Such humungous delays are attributed to lack of infrastructure and mushrooming number of cases. That is true; we need more NCLT benches and judges. But there is more to the delay than lack of infrastructure.
In many high-profile cases, lenders have prolonged the process because they couldn’t come to a decision and also in the hopes of getting improved offers. That cocks a snook at the principle of time-bound resolutions.
The fact that some applicants had to approach the courts to restrain lenders from considering bids that were made after the deadline is shameful. Such bids should automatically be thrown out or delays will be endemic.
It was precisely to prevent a repeat of the Binani and DHFL episodes (where there were delays and litigation after bidding continued past the deadline) that the IBBI announced the Challenge mechanism in insolvency process so that there is balance between the twin objectives of maximization of value for stakeholders and timely resolution.
Forget accepting a bid like the Hinduja one which missed the deadline, but even allowing a second round of auction flies in the face of law. Unless of course, it can be proven that there was something wrong in the first round of auction. This is just a recipe for further litigation. It will also give a bad rep to the IBC process and turn off participants in further insolvency resolution cases.
S Murlidharan is a chartered accountant and columnist. Views are personal and do not represent the stand of this publication.
