More professionals are being certified as Insolvency Professionals under the Bankruptcy Code, but are they sufficient to chart the course of a company to insolvency resolution? Sugata Sircar, CFO and Country Finance Partner, Schneider Electric, Greater India Zone, shares his insights.
We are an aspiring country! We are excited about our opportunities. We want to grow and scale up in business and economy. Businesses in India have been investing heavily on growth under this euphoria. When the economy collapsed about eight years ago, the debt which was used to finance investments in growth became a burden too heavy to bear. Companies were paralysed, with no growth and idle investments, while banks ran up their non performing assets (NPAs).
So the Bankruptcy Code is understandably in focus. Much has been transformed by the SARFAESI Act as far as policy and regulations are concerned. For implementation of the Code, more professionals are being certified as Insolvency Professionals. The NCLT has started issuing its rulings.
Financial and Operational Creditors can trigger the Insolvency Resolution Process. The company receives a morartorium for the duration of the process. In 180 days, or with extension, 270 days, there has to be a decision for reconstruction or liquidation of the company. The Insolvency Professional takes over during this period.
My thought is this. Mostly, such companies reached their present condition as the investments did not yield the revenues, and they have a huge debt burden. So they need funds and they need strong governance for recovery.
The Insolvency Professional is an outsider to the business. He can at best ensure governance, assess the sustenance of the market, pricing, costing and execution mechanism of the company. The management knows best about the markets and indeed the risk profile of the business. The Insolvency Professional has to use their expertise to the most to assess the sustenance of the business.
|An Insolvency Professional can at best ensure governance, assess the sustenance of the market, pricing, costing and execution mechanism...|
The best chance of recovery for such a business would be with the help of an Asset Reconstruction Company, as that would mean the company’s debt is transferred to a Trust. If the debt is off the company’s back, they can focus on the business. In such cases, there is often a measure of replacement of the management of the company. This has to be carefully considered. While some key management intervention must be brought in, certain key managerial persons should be continued from the existing team. For one, they know the market, know the varying nature of risk and return of each segment and have the relationships. Equally, the market would be assured by the fact of the reconstruction. The execution mechanism must be assessed by the Insolvency Professional, or later by the ARC. Best practices must be brought in, again with the help of most of the existing team. Finance must be controlled through a new CFO, who must also lead a risk management team. The risk management team should assess all new opportunities and business decisions on sales, marketing, capital and operating expenditure.
As this space evolves, we will see some strong Insolvency Professionals emerging, who will learn through their engagement in this process and will become a specialised and sought-after group. We should also see more Asset Reconstruction Companies managing viable deals.
On another note, we are at a stage where some great companies built by the entrepreneurial opportunities in the last 30 years, now see change of guard. Entrepreneurs who honourably stepped down after successful stints, could not let go in effect. Sadly, one such company is reeling under the tension. If a board managed company is not following good governance, shareholders have remedy under laws and regulations to address it. If they have sufficient cause, the regulator can conduct an investigation. If a shareholder feels that the business itself is not being run properly, he can bring about action through shareholders’ rights. He, of course, has the choice to divest the stock. When a promoter shareholder becomes a non executive and a minority shareholder, does he have anymore rights than other minority shareholders? The answer is obvious. Personal assaults and slander on a duly appointed board is wrong and this episode goes down as the biggest disappointment for me in the business world in the last few weeks.