After strong observation by the National Company Law Tribunal (NCLT) and Parliamentary Standing Committee on Finance on deep haircuts in recent insolvency resolution cases and several other discrepancies on part of lenders, the Insolvency and Bankruptcy Board of India (IBBI) has approved the code of conduct for Committee of Creditors (COC)—one of the key stakeholders in the resolution ecosystem.
The IBBI board, in its meeting held on last Friday, has approved the code of conduct for lenders, according to sources close to the development.
A top IBBI source tells Fortune India, "IBBI has approved the code of conduct to be followed by the committee of creditors in the insolvency resolution process. The broad guidelines have been approved. The government will now frame the regulations." The source points out that the code of conduct is likely to be notified by mid-October.
Another source tells that the code approved by IBBI will ensure best practices for adherence to the provisions of Insolvency and Bankruptcy Code, 2016 by the banks financial institutions. "The code of conduct will weed out the adhoc-ism that has crept in the working of the COC," the source says.
In June this year, Mumbai NCLT made a strong observation while approving the ₹2962.02 crore resolution plan of Vedanta Group firm Twin Star Technologies for Videocon Industries Ltd against total admitted claims of ₹64,838 crore—translating into a haircut of 95.85% voted unanimously by the creditors. The NCLT asked whether the committee of creditors was taking a 'haircut' or a 'total shave'. State Bank of India is the lead banker in the Videocon COC.
Similarly, the Chennai NCLT too ordered the liquidation of Siva Industries overturning the Committee of Creditors' plea for settlement of ₹328.21 crore against the admitted claim of ₹4863.87 crore (93.5% haircut). The bench remarked that it will like to follow its judicial wisdom than the commercial wisdom of the creditors. Siva Industries moved NCLAT earlier this month against the NCLT ruling.
The issue of haircut has also been recently flagged by the Parliamentary Standing Committee on finance, which called for a code of conduct for the creditors.
"Keeping in mind the experience gathered so far, there is an urgent need to have a professional code of conduct for the COC, which will define and circumscribe their decisions as these have larger implications for the efficacy of the code," reads the Standing Committee report dated August 3.
It may, however, be noted that the code of conduct for the committee of creditors approved by the IBBI will serve as a set of guidelines only and won't have any penal provisions or any statutory enforcement.
According to data from IBBI, haircut to the tune of 80% has been witnessed in 363 major resolution cases in the last four years.
IBBI data reveals that total recovery in 400 major cases resolved in the last four years was to the tune of ₹2.5 lakh crore, with a haircut of 60%.
