The Insolvency and Bankruptcy Board of India (IBBI) should implement a code of conduct for the Committee of Creditors (CoC), as their performance in the insolvency process has been “deficient on many fronts”, Reserve Bank of India (RBI) Deputy Governor M. Rajeshwar Rao said on Saturday.
IBBI issued self-regulatory guidelines to enhance the professional competence of CoCs in August, with Rao stressing the need for enforceable rules, arguing that “when incentives are not perfectly aligned, deviations from best practices are common”.
Speaking at the IBBI and INSOL India International Conclave, Rao advocated for a market-driven compensation framework for resolution professionals (RPs) as opposed to regulatory mandates.
“The Insolvency and Bankruptcy Code (IBC) provides the CoC with a central role in the corporate resolution process. However, this is an area where significant improvement is required. There are instances where the performance of the COC has been found lacking in many aspects,” Rao said. A CoC usually includes financial creditors in bankruptcy cases under the IBC, and may also include operational creditors with limited participation and voting rights.
Rao prioritized the interests of individual creditors over collective interests, disputes over resolution plans due to concerns about undervaluation or viability, disagreements over profit distribution even after plan approval, poor attendance at CoC meetings, and inadequate engagement, coordination, and information sharing among members. “Instances have been noted regarding inadequate skill sets in areas such as corporate finance, law and industry knowledge,” he said.
In August this year, IBBI issued guidelines for CoCs to prevent delays, increase transparency, and disclose any conflicts of interest, and improve value realization by maintaining integrity, confidentiality, and objectivity. However, the guidelines were self-regulatory in nature.
“It is in the greater interest of lenders that issues related to the conduct of CoCs are addressed by the members themselves without waiting for regulatory prescription. However, it is a fact that when incentives are not perfectly aligned, deviations from best practices are common. Therefore, we need an enforceable code of conduct for CoCs.” needed,” said Rao.
He said that the IBBI, which is the designated regulator under the IBC, should be empowered to enforce norms for the conduct of all stakeholders within the IBC framework.
Rao also called for a market-driven compensation framework for RPs to align their targets with the CoC and avoid collusion with previous management. “The market should develop compensation structures for resolution professionals that are linked to the results of the resolution process. These measures can address the key agent issue and align the RP’s goal with CoC, maximizing value for both parties. It will also attract experienced professionals, thereby improving the overall system. It’s worth it,” he said.
In 2022, the CoC was allowed to award performance-linked incentive fees to RPs at its discretion. An RP can earn up to 1 percent of the realizable value for timely resolution of bankruptcy proceedings, and an additional 1 percent of the difference between the realizable value and the liquidation value for achieving value maximization.
“Rules can set limits for activity but cannot cover every detail. The rules have helped create an ecosystem of RPs, but their compensation should be determined by the market based on commercial considerations. Managing a corporate debtor under insolvency proceedings requires special skills,” Rao said.
As of September 2024, a total of 8,002 bankruptcy cases were admitted under the IBC, 2016. Of these, resolution plans were approved in 1,068 cases (13 percent), 2,630 cases (33 percent), and 1,963. Cases (25 percent) are ongoing. The remaining cases were either withdrawn, closed on appeal, or settled.