In separate notifications over the weekend, IBBI allowed creditors to sell part assets in case they get more value. More importantly, the regulator also announced a performance-based pay structure for resolution professionals (RPs). Both moves will have far-reaching changes to recoveries, consultants said.
“Allowing RPs an incentive based on recovery value aligns with the objectives of all stakeholders. Creditors were so far averse to working with a performance-based fee plan and that has led to a decline in the quality of the resolution and as result the recovery value. Incentives will make resolution professionals strive to optimize the value of the corporate debtor,” said Nikhil Shah, managing director of Alvarez & Marsal (A&M) India.
In a notification, IBBI has for the first time set a minimum fixed fee for RPs. Depending on the size of claims admitted, RPs can now earn between ₹1 lakh and ₹5 lakh per month. More importantly, incentives have been built in for both timely resolution and value maximisation.
An RP is now entitled to 1% of the realisable value if the resolution plan is submitted to the National Company Law Tribunal (NCLT) in less than 165 days. Conversely, he gets nothing if the plan is submitted after more than 330 days.
The RP is also entitled to 1% of the difference between the realised value and the liquidation value as an incentive for value maximisation. This change is effective from October 1.
Consultants said the amendments will push creditors to go for better quality professionals and also put the onus on RPs to speed up the process.
“Fees should not be a constraint to get the best value. It was seen that lenders were reluctant to go for performance-based incentives and in many cases had to settle for lower realisations because of poor quality of work. While this is a welcome move I would say that getting professional help should not be an issue and such costs should be borne separately in the resolution plan because it makes a difference both in terms of value as well as timelines,” said Abizer Diwanji, head financial services EY.
IBBI has also allowed creditors to sell assets separately in cases where no resolution plan has been received for the corporate debtor as a whole, thereby maximising value.
Bankers and consultants say that there have been cases where the piecemeal sale of assets was a better option. Like in the case of DHFL which was completed last year where the retail book was much sought after for its high yield, strong asset quality and wide network. But lenders chose to sell it together with the bad loan-infested wholesale business which dragged the value down.
“There have been cases where the overall value could have been higher but it could not be achieved as all the assets of the corporate debtor were being offered to resolution applicants as a whole. Both these changes are important and will help achieve better outcomes for all stakeholders in the insolvency process,” said Shah from A&M India.