In separate announcements over the weekend, the IBBI allowed creditors to sell partial assets in case they received more value. More importantly, the regulator has also announced a performance-based pay structure for settlement professionals (RPs). Consultants say both moves will have sweeping changes to the recovery.
“Allowing RP is incentivized based on recoverable value that aligns with the goals of all stakeholders. Creditors have historically disliked working with a performance-based fee plan and that’s it. led to a reduction in the quality of the solution and as a result the value of recovery, said Nikhil Shah, managing director of Alvarez & Marsal (A&M) India.
In an announcement, IBBI set a minimum flat fee for RP for the first time. Depending on the size of the request accepted, RP can currently earn from ₹1 lakh to ₹5 lakh per month. More importantly, incentives have been integrated for timely resolution and maximum value.
RP is currently entitled to 1% of the workable value if a settlement plan is submitted to National Corporate Law Court (NCLT) in less than 165 days. In contrast, he receives nothing if the plan is submitted after more than 330 days.
The RP is also entitled to 1% of the difference between the exercise value and the liquidation value as an incentive to maximize value. This change takes effect October 1.
The advisors said the amendments would push creditors to find better quality professionals and also boost the RP to speed up the process.
“Fees shouldn’t be a constraint on getting the best value. Lenders have been found to be reluctant to adopt performance-based incentives and in many cases have to settle. for lower earnings because of the poor quality of work While this is a welcome move I would say that getting professional help is not an issue and such costs should counted separately in the settlement plan because it makes the difference both in value as well as in duration,” said Abizer Diwanji, head of EY financial services.
IBBI has also allowed creditors to sell assets separately in the event that a settlement has not been received for all of the company’s debtors, thus maximizing value.
Bankers and advisors say there have been cases where a partial sale of the property is a better option. Like the case of DHFL completed last year, where retail books are highly sought after for their high productivity, strong asset quality and extensive network. But the lenders chose to sell it along with the bad debt-infested wholesale business, which dragged down the value.
“There have been cases where the overall value could have been higher but could not be achieved because all assets of the corporate debtor were made available to settlement applicants. Both of these changes are significant and will help achieve better outcomes for all Shah from A&M India said stakeholders in the bankruptcy process.