For extracting maximum value under Insolvency Bankruptcy Code, asset reconstruction companies must be allowed to turn around distressed businesses. Do you agree with this view? Comment (200 Words)
Refer - The Indian Express
Enrich the answer from other sources, if the question demands.
IAS Parliament 3 years
KEY POINTS
· Going by the stance taken by the RBI, an ARC can participate in resolutions under the Insolvency and Bankruptcy Code, 2016 (IBC) only if it partners with an equity investor, which is the resolution applicant.
· The RBI doesn’t appear to favour such an extended role for ARCs. This hesitation is not without basis. In the aftermath of the Asian financial crisis, countries like Indonesia, Korea and Malaysia established centralised, typically state-owned, asset management companies (AMCs) for resolution or restructuring of distressed financial institutions. At that time, India’s non-performing assets stood at a whopping 14.4 per cent.
· The maximum average recovery by ARCs as a percentage of total bank claims stood at 21.5 per cent in 2010. Since then, it has steadily declined and reached 2.3 per cent in 2018. Such low recovery is likely the outcome of a resolution model heavily dependent on collateral disposal rather than genuine business turnarounds.
· Now the IBC seeks to maximise the value of distressed businesses through a market for corporate control. ARCs should be able to fully participate in this market and attempt successful turnarounds by acquiring strategic control over distressed businesses.
· Currently, investors could potentially use three kinds of domestic investment vehicles — Alternative Investment Funds, Non-Banking Finance Companies and ARCs — to invest in companies undergoing IBC resolution.
· While AIFs can invest in debt as well as equity subject to certain limitations, they don’t enjoy enforcement rights under SARFAESI Act, 2002. NBFCs enjoy the enforcement rights but are subject to provisioning norms for NPAs they purchase from banks. None of these limitations applies to ARCs.
· If only ARCs are allowed to directly participate in IBC resolutions by infusing equity, they could emerge as the most efficient vehicle for turning around distressed Indian businesses.
