MUMBAI: Reserve Bank deputy governor M Rajeshwar Rao has called for an enforceable code of conduct for the committee of creditors (CoCs) under the insolvency resolution process, saying their performance so far has been lacking.
Noting that the Insolvency and Bankruptcy Code (IBC), which was introduced in May 2016, has gained significant traction as a recovery and resolution mechanism, Rao also said significant improvements are needed with respect to the area of CoCs.
“The CoC has a key role in implementing the corporate insolvency resolution process under the IBC as there have been instances where the CoC's performance has been found lacking in several aspects,” Rao told a conference in the national capital last week jointly organised by the Insolvency and Bankruptcy Board of India and Insol India. The RBI released the speech only Tuesday.
"This includes disproportionate prioritisation of individual creditors' interests over the collective interests of the group, disagreements among CoC members on approving the resolution plan due to concerns about undervaluation and perceived lack of viability, disagreement over the distribution of the proceeds," he explained.
Calling for significant improvements with respect to the area of CoCs, Rao said even when the resolution plan is agreed upon, there have been instances of non-participation in the CoC meetings and a lack of effective engagement, coordination or information exchange among the members.
According to him, nominees of financial creditors in CoC are entrusted with responsibilities that far exceed their actual authority.
"It is in the larger interest of the creditors that issues related to the conduct are addressed by the members themselves without waiting for the regulatory prescription," he said, adding when incentives are not perfectly aligned, deviations from best practices become the norm, he said, adding that "we need an enforceable code of conduct for the CoC".
"Ideally, the Insolvency and Bankruptcy Board of India should have the powers to enforce norms for the conduct of all the stakeholders under the IBC process," he said.
Touching upon the role of insolvency resolution professionals who have a lot of operational responsibilities, and in many instances, he said the resolution professionals do not enjoy the cooperation of other stakeholders to discharge their duties.
Mentioning incentivising resolution professionals, Rao said compensation should be determined by the market based on commercial considerations.
The deputy governor also made various suggestions to further improve the insolvency resolution process, including addressing delaying tactics used by corporate debtors and having a better understanding of the reasons behind defaults. He emphasised that the real success of a formal insolvency process lies in its role as a deterrent rather than based on its use.
Till March 2024, around 28,000 cases involving an outstanding default amount of Rs 10 trillion were withdrawn prior to admission, he noted.