Plugging InvITs Into IBC - Risking National Assets

NITI Aayog, which prepared the blue-print for the NMP, has now recommended that InvITs be brought under the Insolvency & Bankruptcy Code (IBC) to attract retail and institutional investors towards achieving NMP goals. InvITs are not persons in the eye of law; the Aayog proposes recognition of the investment trusts as legal persons in order that they can be conferred the crown of 'corporate-debtor'-hood, should the exigency arise. The recommendation does not appear to be based on a serious scrutiny or study of its implications. This article examines the structural and operational issues and constraints of bringing InvITs under the IBC, without going into the merits of NMP.

The IBC was enacted, taking a cue from the UNCITRAL model code and the Bankruptcy Legislative Committee models, for dealing with insolvency and restructuring corporate assets. The previous chaotic regime had resulted in India being ranked low in the World Bank's "Ease of doing Business" Index. The laudable objects of the law include identification and timely resolution of stressed asset situations, and reorganisation and insolvency resolution of corporate entities, partnership firms and individuals in a time-bound manner so as to maximise the value of their assets. The framework promotes entrepreneurship, improves availability of credit, and balances the interests of all stakeholders. It purported to be a complete code, also addressing preferential, undervalued, fraudulent and extortionate (PUFE) transactions towards disgorgement of the funds and assets.

The scheme of IBC envisages shifting the "Debtor in Possession" to the "Creditor in control". Two important players in the Corporate Insolvency Resolution Process (CIRP) are: the Committee of Creditors (CoC), constituted only with Financial Creditors, who drives the CIRP,; and the Resolution Professional (RP) who manages the CIRP with the approval of the CoC. Unfortunately, the focus of the CIRP has been only on recovery to the financial creditors - often with huge haircuts, and cleaning of the balance sheets of the public sector banks. No worthy adjudications are forthcoming on the PUFE transactions, though a large number of applications have been filed by the RPs and reported in Information Memoranda and to the Insolvency & Bankruptcy Board of India (IBBI).

Alvarez & Marcel (A&M) in their recent report analysed the systemic delays in IBC and their impact on recovery value. Analysing recovery patterns for 246 out of 277 resolution cases (as of September 2020), where the resolution plan was approved by the National Company Law Tribunal (NCLT), the Report observes: "If we exclude the two cases with the highest recovery by value - Essar Steel and Binani Cements - the highest recovery is seen in the resolution cases that have been closed within 300 days." With increase in resolution time, recovery percentages fall sharply by 15–25 percent. The average recovery observed in resolved cases for financial creditors ("FC") has been 41 percent as of September 2020.

Presently, the rescue mechanism of the IBC is available to Corporate Debtors (CDs) constituted under the Company's Act and partnership Firms registered under the LLP Act, and individuals. The corporate debtor is an entity regulated by numerous statutory compliances aimed at accountability. The RP too is also bound by the compliance mechanisms, while managing the CIRP. A trust on the other hand is bound by the provisions of the Trust Deed and the Indian Trust Act, without such routine compliances. So, its structural compatibility with a resolution process would itself be in question.

InvITs are independent investment trusts regulated by the SEBI (Infrastructure Investment Trusts) Regulations, 2014. The Regulations mandate the following governance structure, which is external to an InvIT:

1. a Sponsor (a public sector agency, who undertakes the InvIT issue through private placement or public issue);
2. a Trustee (an entity holding the InvIT assets for the benefit of unit holders, whose activities are regulated under a formal trust deed entered into between the Sponsor, InvIT and the trustee laying out the roles and responsibilities of each member of the trust);
3. an Investment Manager (an entity responsible for the management of assets and investments of the InvIT); and
4. a Project Manager (an entity with necessary technical expertise that undertakes operations and management of the InvIT assets, including making arrangements for the appropriate maintenance, either directly or through the appointment and supervision of appropriate agents).

The four companies (or entities) governing the InvIT and its assets qualify for 'Corporate-Debtor'-hood, but seem to be risk-avoidant entities. Despite the noble intentions of the framers of IBC, a significant number of insolvency resolution cases result in grave losses for the creditors (both financial and operational), cosmetically described as "haircuts". The NCLT, while approving the sale of Videocon Industries to Twin Star Technologies, frowned upon the 99.28 per cent cut that operational creditors were forced to accept describing it as a 'tonsure' rather than a haircut. There are very many instances of the Operational Creditors being provided zero recovery.

The Report of the Standing Committee on "Implementation of IBC" presented to the Parliament on 3^rd August 2021 has set out its pitfalls and solutions. Analysing data up to May 2021, it was noted that 1,318 cases referred to IBC headed for liquidation against 365 cases resolved, i.e., 4 in 5 cases. As per IBBI data as on March 21, the claim value of the cases headed for liquidation was ₹6.65 lakh with a liquidation value of ₹0.34 lakh, approximately 5% (Haircut expected 95%).

Though the Code envisages an institutional mechanism and high degree of professional standards for the RPs, many RPs do not have the width of experience or expertise to fulfil their multi-faceted role. The Committee observed that "123 disciplinary cases have been initiated by the regulators against RPs out of 203 inspections. This number is alarming. Needless to add, the success of IBC is heavily reliant on a team of competent professionals with impeccable integrity." The Committee insightfully notes: "At present the commercial decisions are left to the wisdom of CoC. However, there is no test check how this is being exercised. The Committee suggests scope to define and circumscribe the decisions made at CoC."

The brown field projects envisaged under the NMP include 26,700 km of roads, railway stations, train operations and tracks, 2,8608 Ckt km worth of power transmission lines, 6 GW of hydroelectric and solar power assets, 2.86 lakh km of fibre assets and 14,917 towers in the telecom sector, 8,154 km of natural gas pipelines and 3,930 km of petroleum product pipelines to private players. The recommendation of the NITI Aayog that InvITs be brought under the IBC regime does not appear to be informed by its performance deficit and operational realities of the IBC.

The NMP document asserts that "Asset Monetisation needs to be viewed not just as a funding mechanism, but as an overall strategy for bringing about a paradigm shift in infrastructure operations, augmentation and maintenance. This is especially considering the potential for resource and capital efficiencies as also the ability to dynamically adapt to the evolving global and economic reality." Both the structural incompatibility of InvITs with the IBC framework, and the deplorable record of IBC resolution processes show that bringing InvITs into the purview of the IBC would hardly advance the "overall strategy" that the NMP envisages. A tonsure of national assets is a risk that the nation can ill-afford now or at any time.