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Bankruptcy board spells out ‘eligibility’

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Entities will have to form a separate subsidiary with dedicated resources related to insolvency

The first order issued by the recently-established Insolvency and Bankruptcy Board of India (IBBI) is expected to set in motion a chain of events at many firms, including well-known consultancies that are eyeing the huge market for stressed assets and debt resolution.

In its March 2 order, IBBI rejected an application for registration as an Insolvency Professional (IP) by an individual who works with one of the so-called Big Four consultancy firms. “… an IP must not ‘engage in any employment’, repeat ‘any employment’. It envisages that a person must not play two roles — profession and employment — simultaneously,” according to the order.

Practitioners in the segment say that the order has made it clear that IBBI is not going to grant registration to individuals in such a scenario and so entities that want to be registered will have to form a separate subsidiary with dedicated resources related to insolvency and bankruptcy work.

Dedicated resources

“Most firms, including ours, are considering forming a separate entity or an LLP where we have such dedicated registered resources,” said Ashish Chhawchharia, Partner, Grant Thornton Advisory. “The law does allow insolvency professional entities or IPEs wherein the majority of partners are registered IPs.”

In a similar context, Sumit Khanna, Partner and National Head Corporate Finance & Restructuring Services, Deloitte said that while it was too early to comment on the possible restructuring that firms would have to undertake to participate in this segment, they had already started strengthening their in- house resources.

“Deloitte is one of the most active players in this segment though it is too early to conclude if we need to set up a separate entity to house the practice as the final engagement will be in the name of a registered IP only,” Mr. Khanna said. “We will take a call once business reaches a critical threshold. We are augmenting our strong domestic team with in-house expertise in this practice area from overseas markets such as U.K. and U.S., where we are large players in this segment.”

It is clear that the firms are betting big on a segment that is showing enough signs of having a huge business potential. In the one-year period ended September 2016, gross non-performing assets (NPAs) as a percentage of gross advances jumped to 9.1% from 5.1%, as per Reserve Bank of India (RBI) data.

“This segment is going to be extremely large in the future. There is around ₹6.6 lakh crore worth of recognised NPAs in the banking sector as of today,” said Mr Khanna. “While the smaller loans could go to the regular firms, large stressed assets would require the expertise of large firms. The initial number of cases could well over be 2,000.”

‘Same direction as SEBI’

Legal experts say that the first order from IBBI has set a tone on how it is going to interpret the provisions of its regulations and is in line with the views of other regulators.

“It has held that the insolvency professional work requires full time attention and would not countenance an IP riding two horses or more at a time,” said Sumit Agrawal, Partner, Suvan Law Advisors. “The order brings clarity on eligibility norms to be an IP and is in the same direction as SEBI or other regulators expect a person who is a registered intermediary.”