Bankruptcy Code to improve investor confidence, corporate bond market: Crisil

The passage of the Insolvency and Bankruptcy Code 2016 by the Lok Sabha last week will improve investor confidence and deepen the corporate bond market, said Crisil Ratings in its recent research note. 

The Lok Sabha on May 5 backed a new bankruptcy code, a crucial step towards establishing a debt resolution regime to strengthen the hands of banks seeking to recover $120 billion (nearly Rs 7.98 crore) in troubled loans. The Insolvency and Bankruptcy Code 2016, was passed by a voice vote last week in Lok Sabha and is expected to be approved by Rajya Sabha this week. 

The bill is a watershed reform that will structurally strengthen the identification and resolution of insolvencies in India, Crisil said. 

The proposed bankruptcy law will improve 'ease of doing business' in India by expediting resolution of stressed assets and streamlining the process of liquidating a business, PTI reported last week citing people from the industry.

"While lenders and asset reconstruction companies (ARCs) are the immediate beneficiaries, the code will also significantly improve India's 'ease of doing business' ranking," cited the ratings agency in a report.

"It's a historic step taken towards strengthening our 'ease of doing business' in our country. The subject of default has been in the news of late and the Code could not have come at a more opportune time since this subject would also get dealt with through this Code to some extent," PTI said quoting CII Director General Chandrajit Banerjee as saying. 

According to Crisil, the Code enhances the right of a creditor to identify insolvency and initiate resolution proceedings through an ecosystem that will include a new regulator and information utilities.  It attempts to simplify legal processes, preserve value for creditors and provide them with greater certainty of outcome. Over the long term, it will enhance creditor rights, boost investor confidence and facilitate deepening of India’s corporate bond market, the ratings agency said.The ratings agency believes that the Code will make borrowers accountable and will also generate investors interests in lower-rated corporate bonds adding its implementation is critical. 

“We believe the Code will instil far greater financial discipline among borrowers. It can also potentially kindle investor interest in lower-rated (below 'AA' category) corporate bonds, which will help in deepening the market. But implementation of the code is critical and the build-out of the ecosystem will take time,” Pawan Agrawal, Chief Analytical Officer, Crisil Ratings, said in a note.  

The ratings agency said for asset reconstruction companies (ARCs), the new Code, along with 100% foreign direct investments (FDI) announced in the Union Budget for the current fiscal, will boost capital flows and make them an increasingly important intermediary between lenders and borrowers.

As per Crisil's analysis, the recoveries by ARCs have been low approximately 36% with the average resolution taking about five years. This is in line with a World Bank study, which said it takes more than four years to wind up a sick company in India, or twice the time taken in China, with recovery at just approximately 25%, which is among the lowest in emerging economies. 

The new Code prescribes a much faster timeline of 180 days for resolution, it noted.

“Quicker resolution will allow ARCs to churn capital faster and enhance returns. It will also attract investments into the distressed assets space,” Krishnan Sitaraman, Senior Director, Crisil Ratings, said in a note. 

Crisil Ratings is hopeful that in the long run, the Code will expedite the resolution of weak assets resulting in an increase in capital inflow for banks whereby boosting credit expansion.

"But in the long run, the code will structurally hasten the resolution of weak assets (currently forecast at approximately Rs 8 lakh crore by March 31, 2017) problems, thereby releasing precious capital for the banking system, which, in turn, will encourage credit expansion," Crisil noted.  

(With PTI Inputs)