RBI Governor pushes for group insolvency mechanism

Context: RBI Governor Shaktikanta Das advocates for a specified framework for the group insolvency mechanism and a vibrant market for stressed assets in India to enhance the functionality of the Insolvency and Bankruptcy Code (IBC).

News:

• Legislative changes to establish appropriate principles for the group insolvency mechanism, addressing challenges like intermingling of assets, defining a 'group,' and handling cross-border aspects are suggested.
• Emphasis is placed on the absence of a robust market for stressed assets in the country, limiting prospective resolution applicants under IBC, even for regulated entities outside the IBC process.

Need of insolvency mechanism:

• Recovery rates under IBC stand at 32%, with creditors realizing Rs 3.16 lakh crore out of admitted claims of Rs 9.92 lakh crore as of September 2023.
• The IBC has led to a substantial behavioural shift, evident from the withdrawal of 26,518 applications for initiation of Corporate Insolvency Resolution Processes (CIRPs) till August 2023 but there are concerns about the time taken for resolution and the extent of haircuts in comparison to admitted claims.
• Data reveals delays in the resolution process, with 67% of ongoing CIRP cases surpassing the total timeline of 270 days, raising concerns about substantial erosion of asset value.
• Adjudicating Authorities express concerns about the conduct of the Committee of Creditors (CoC) in insolvency proceedings, highlighting issues such as lack of participation, coordination, and prioritization of individual interests over collective interests.

Insolvency

It is a state of financial distress in which a person or business is unable to pay their debts. Insolvency is when liabilities are greater than the value of the company, or when a debtor cannot pay the debts they owe.