ANALYSIS OF THE STRESSED ASSET MARKET UNDER

IBC

INTRODUCTION
The introduction of the Insolvency and Bankruptcy Code (IBC) has been considered a pivotal
moment in the legal-financial jurisprudence of India. The code primarily looked into the stressed assets
and improved the credit culture in India. It was stated by Shri M. Rajeshwar Rao, Deputy Governor,
of the Reserve Bank of India (RBI), in his 2022 speech that the Code made a paradigm shift. In pre-
IBC resolutions, the main efforts were towards the preservation of companies and employment, at
the credit discipline and production efficiency of the economy. After the code was implemented, it
created a model that was more centred towards the “creditor-in-control” model.1 By doing so the
Code “resets” the balance between the creditor and the debtor. However, even with such changes
recently, RBI Governor Shaktikanta Das stated that even though the Code was successful in
implementing the insolvency process, the admission time of the cases stood from 468 days to 650
days due to delays. Such long degrees of delays substantially eroded the value of the assets. Therefore,
Governor Das proposed the creation of a there should separate market for stressed assets as its
absence effectively limits the pool of prospective resolution applicants for stressed assets under the
IBC.2 Therefore, this paper aims to give an analysis of the distressed assets market under IBC and also
looks into the possibility of a separate market for stressed assets in India

The paper is organized into three sections. The first section gives a brief history of IBC and its process
to give familiarity to the reader. It further looks into how stressed assets are identified and classified.
The second part will examine the impact of creditors and investors. The third and final segment will
investigate the current system's faults and critiques. In addition, this section will also discuss system
prospects and possible policy recommendations.

1 ‘Resolution of Stressed Assets and IBC’(IBBI, 30 April 2022)

<f98e85bfcbc448eef99b0b5c323e565c.PDF (ibbi.gov.in)>accessed 13 January 2024
2 ‘Insolvency & Bankruptcy Code – Towards Achieving Full Potential’(IBBI, 11 January 2024)

<rbidocs.rbi.org.in/rdocs/Speeches/PDFs/ADDRESSBYGOVERNORCAFRALIBC0E26AB4786BE46CCBE955155
63021E2F.PDF>accessed 13 January 2024
BRIEF HISTORY OF THE IBC
The IBC is a comprehensive law that was enacted in India in 2016 to provide a one-stop solution for
resolving insolvencies, which previously was a long process that did not offer an economically viable
arrangement. Due to this, there was there as a major growth in Non-Performing Assets (NPA) in
2015. The code was implemented with the aim of protecting the interests of small investors and
making the process of doing business less cumbersome.

Before 2016, the main legislation that looked into resolving insolvency the Sick Industrial Companies
Act of 1985 (SICA) was enacted to make special provisions for the timely detection of sick or
potentially sick companies owning to industrial undertakings. The provisions of SICA established two
bodies i.e. the Board for Industrial and Financial Reconstruction (BIFR) and the Appellate Authority
for Industrial and Financial Reconstruction (AAIFR). Both these bodies were formed to determine
the sickness of such industrial companies and to prescribe measures either for the revival of potentially
viable units or the closure of the unviable companies. SICA was repealed by the Sick Industrial
Companies (Special Provisions) Repeal Act, of 2003 which diluted certain provisions of SICA and
filled certain gaps and loopholes. The IBC was notified on May 28, 2016, and came into full effect on
December 1, 2016.3

The main objective of the Insolvency and Bankruptcy Code (IBC) is to consolidate and amend the
laws relating to the reorganization and insolvency resolution of corporate persons, partnership firms,
and individuals in a time-bound manner to maximize the value of such person’s assets. It aims to
promote entrepreneurship, improve the availability of credit, and balance the interests of all
stakeholders, including the alteration in the order of priority of payment of Government dues.
Additionally, the IBC seeks to establish an Insolvency and Bankruptcy Board of India (IBBI) to
regulate the working and functioning of insolvency professionals, insolvency professional agencies,
and information utilities. By doing so, the IBC intends to ensure a smoother and more efficient
resolution process, thereby fostering a more robust and resilient economic environment.

3Uttkarsh Mittal, ‘IBC, 2016 – Objective, Insolvency Resolution Process, Challenges & Way Forward’(Taxguru, 14
February 2023)<https://taxguru.in/corporate-law/ibc-2016-objective-insolvency-resolution-process-challenges-way-
forward.html> accessed 12 January 2024
PROCESS UNDER IBC
When a corporate debtor fails to repay its debts, the corporate bankruptcy resolution procedure can
be initiated through one of many avenues:

• Financial creditors may use Section 7, whereas operational creditors can use Section 9.

• Corporate debtors can use Section 10 of the Code to apply to the National Company Law
Tribunal (NCLT).

The NCLT's admission triggers the implementation of a moratorium, which freezes claims against the
debtor for 6 to a maximum of 9 months under Section 14. Following admission, the NCLT appoints
an interim Resolution Professional (RP) within 14 days to oversee the debtor's assets and operations.4

The interim RP serves for 30 days, acquiring possession of assets, gathering financial information, and
making a public notice allowing creditors to file claims. The interim RP then forms the Committee of
Creditors (CoC), which is made up of financial creditors and excludes debtor's linked parties from
representation, participation, or voting. Operational creditors with aggregate dues of at least 10% of
the debt are members of the CoC but do not have voting rights. Within 7 days of its inception, the
CoC decides whether the interim RP should continue in the position. Under Section 12, the corporate
insolvency resolution process must be completed within 180 days after the NCLT's admission, with a
one-time extension of up to 90 days given if the case is deemed challenging by the CoC. The CoC
makes insolvency resolution decisions, while the RP oversees the process and the corporate debtor.
The RP is required to prepare an information memorandum for resolution applicants (RAs) to help
them develop a resolution plan. After receiving plans from RAs, the CoC analyzes and approves them
before sending them to the NCLT for final approval and execution. Failure to approve any filed plans
results in the corporate debtor entering liquidation.

Between 2015 and 2017, India moved up more than 30 places in both the World Bank's Ease of Doing
Business and the World Economic Forum's Competitiveness Index rankings.

4 Ibid
STRESSED VS. DISTRESSED ASSETS: DEFINITIONS AND
IMPLICATIONS
A stressed asset is defined as any asset whose value has dropped significantly owing to factors other
than typical market conditions. These assets are sold by corporations that are in bankruptcy or will go
bankrupt soon. In many cases, investors purchase these assets at discounted prices and take a gamble
on whether the company will survive and emerge from bankruptcy. The following are different
components that can be regarded as stressed assets

Stressed Assets = NPAs + Restructured loans + Written off assets

 Non-performing assets or NPA are those loans whose interest and/or instalment of
principal have remained ‘overdue ‘for 90 days.
 Restricted assets or loans are those that have received an extended payback time, a lower
interest rate, the conversion of a portion of the loan into equity, additional financing, or
a combination of these steps. As a result, a bad loan is converted into a new loan
throughout the restructuring process. A restructured loan also signals poor asset quality
for banks. This is because a restructured loan was previously an NPA or was converted
into a new loan. However, repayment of the loan still adds to the risk factor of doing
this. The Corporate Debt Restructuring Mechanism (CDM) provides for loan
restructuring.5
 Written-off assets are those for which the bank or lender does not count the amount
owed by the borrower. The bank's financial statement will show that the written-off
debts were compensated in some other way.

However, it is to be noted that stressed assets should not be confused with distressed assets. Although
both of them are used interchangeably at times in a few articles, their meaning is not quite the same.
A stress asset is one in which the source of the stress is clear, and the risks are manageable and
measurable. A distressed asset, on the other hand, has a less evident source and prospective
consequences that are considerably more difficult or impossible to define and evaluate. Due to this,
investors are more cautious around distressed assets. However, in many cases, these assets do provide

5Tojo Jose, ‘What is stressed assets?’ (IndianEconomy.net, 14 February 2016)

<https://www.indianeconomy.net/splclassroom/what-is-stressed-assets/> accessed 13 January 2024
tremendous returns and valuations if investors strategically invest. Furthermore, the IBC does not
specify any methods for identifying distressed assets. Financial institutions, asset reconstruction
businesses, and other investors typically identify troubled assets. The identification procedure includes
a detailed examination of the company's financial records, cash flow, and other relevant data. In
addition, the identification process evaluates the company's management, business model, and
industry.

IBC: DISTRESSED ASSET REVOLUTION

The IBC established a legal structure and definite procedures for distressed asset resolution and a level
playing field for domestic and foreign investors. The IBC has established clearly defined timetables
for the resolution of distressed firms. Investors have maintained their interest in India's distressed
assets industry as a result of regulatory developments in recent years. The Indian government's
commitment to addressing current legal gaps and proposing structural reforms aimed at key
institutional stakeholders in the insolvency ecosystem is expected to drive industry growth. The
Reserve Bank of India's (RBI) report on the Trend and Progress in Banking in India (dated 29
December 2020) indicated that 31.3% of all NPAs in FY 2019-20 were addressed using IBC, up from
3.7% in FY 2017-18.6 The IBC has enabled strategic investors to expand capacity cost-effectively, as
well as purchase distressed assets at attractive valuations. As of 2023, reports indicate that the
resolution rate of distressed assets under the IBC has improved, with an increase in the number of
resolved cases and reduced timelines for case resolution. This suggests ongoing enhancements in the
IBC framework and operational efficiency in insolvency proceedings

Overall, the IBC has played an important role in restructuring India's financial landscape, promoting
a healthier credit culture, and establishing a strong market for distressed assets. Continued regulatory
improvements and efficient implementation will increase the appeal of India's distressed asset market
to global investors. As a result, it is considered a lucrative market for both foreign and domestic
investors.

6Banikinkar Pattanayak,’ Record 273 stressed cases resolved via IBC in 2023’ ( Economic Times, 15 January
2024)<https://economictimes.indiatimes.com/industry/banking/finance/record-273-stressed-cases-resolved-via-ibc-in-
2023/articleshow/106843081.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst>
accessed on 15 January 2024
IMPACT OF STRESSED ASSET MARKET ON CREDITORS AND
INVESTORS
The stressed asset market plays a crucial role in shaping the financial landscape for both creditors and
investors. For creditors, the emergence of a robust stressed asset market can provide a viable exit
route for non-performing loans (NPLs), particularly for banks and financial institutions facing high
levels of non-performing loans (NPLs), as it allows them to recover part of their funds and improve
their balance sheets. This, in turn, “enhances their ability to lend more efficiently and supports overall
credit growth.” 7 (International Monetary Fund, 2020). Investors, particularly those specializing in
stressed and distressed assets, find opportunities for potentially high returns by acquiring these assets
at discounted prices and restructuring them for profitability (Reserve Bank of India, 2019) . However,
the inherent risks of these investments include the uncertainties associated with turning around
distressed businesses and the regulatory challenges within different jurisdictions (European Central
Bank, 2021)

Financial creditors hold the right to initiate insolvency proceedings against a debtor who has defaulted
on their obligations. They possess the privilege to attend a committee of creditors meetings and
participate in voting on resolution plans and enjoy the right to receive comprehensive information
about the debtor and the insolvency resolution process. Additionally, they are entitled to receive
payment from the proceeds of the sale of the debtor's assets. Notably, financial creditors are shielded
against preferential and undervalued transactions made by the debtor before the initiation of
insolvency proceedings. The implications of the IBC on operational creditors, whose claims arise from
normal business transactions, diverge from those of financial creditors. While operational creditors
retain the right to initiate insolvency proceedings against a defaulting debtor, they do not have a voting
share in the Committee of Creditors (COC). The IBC provides safeguards for operational creditors,
ensuring priority in the repayment of dues and necessitating mandatory disclosure in resolution plans
regarding the treatment of their interests.

7[IMF Report](https://www.imf.org/en/Publications/WP/Issues/2020/02/28/Addressing-the-Impact-of-Non-
Performing-Loans-on-Banks-48915)
Stressed assets significantly influence investor confidence and market dynamics, manifesting in a
nuanced interplay of reactions. When a corporation has a large number of stressed assets, investor
confidence suffers, resulting in a drop in stock prices and market capitalization. This, in turn, may
limit the company's capacity to raise financing in the future. Conversely, responses to stressed assets
can vary; some investors may perceive an opportunity to acquire stocks at a reduced price, leading to
increased demand and a subsequent rise in stock prices. It is difficult to ascertained company stock
value based on strength of balance sheet which will then be negatively portrayed stocks Due to
negative sentiments of investors of the company stock. The resolution of stressed assets can further
enhance a company's financial standing, contributing to heightened investor confidence and an uptick
in stock prices. Jyoti Prakash Gadia, MD of Resurgent India, who is associated with one of India's
biggest Insolvency Professional Entities (IPE) firms where they are handling more than 50 cases
looking for buyers of stressed assets, stated “The Indian banks have a mountain of the stressed assets,
but the buyers are showing less interest in bidding. that only half the buyers are expressing interest in
bidding projects.”8 Resurgent India is a firm that handles government disinvestment projects and they,
through their managing director, are stating that “the value of stressed assets is at diminishing with no
stop point in sight.”9NCLT route with major advantages waste method mentioned for resolving these
assets.10 However, absence of judges or lack of infrastructure is affecting the timeline that needs to be
adhered to.11

Moreover, the COVID-19 pandemic has exacerbated the volume of stressed assets, highlighting the
need for a well-regulated and transparent market to ensure that such assets are managed effectively
and fairly (Business Today, 2020). The Gross Non-Performing Assets (GNPA) of scheduled
commercial banks are projected to witness a substantial increase, positioning India as an attractive
destination for stressed asset investors and special situation funds. 12 The regulatory clarity provided
by the IBC proves instrumental in facilitating the resolution of bad loans and corporate restructuring,

8 Amol Dethe, ‘Banks stressed assets receive interests from only half the buyers: Resurgent India’ (BFSI, 19 October
2020)<https://bfsi.economictimes.indiatimes.com/news/financial-services/stressed-asset-value-shrinks-by-15-with-
half-the-takers/78357080> accessed on 14 January 2024
9 International Monetary Fund. (2020). “Addressing the Impact of Non-performing Loans on Banks.”
10 Jyoti Prakash Gadia. Resurgent India. (2020). [Financial and Operational Creditors’

Rights](https://resurgentindia.com)
11 Amol Dethe, ‘Banks stressed assets receive interests from only half the buyers: Resurgent India’ (BFSI, 19 October

2020)<https://bfsi.economictimes.indiatimes.com/news/financial-services/stressed-asset-value-shrinks-by-15-with-
half-the-takers/78357080> accessed on 14 January 2024
12 Nirmal Gangwal,‘The winning strategy for distressed asset investors’ (Business Today, 3 November 2021) <The winning

strategy for distressed asset investors - BusinessToday>accessed 12 January 2024

attracting both domestic and global investors to the market. In explaining the effects of the COVID-
19 pandemic on the aforementioned assets, Jyoti Prakash Gadia highlighted a persistent difficulty that
has emerged in the last half-year: the inactive condition of pre-existing legal matters due to court
closures.13 Over the last three to four months, there has been a noticeable reduction in potential
bidders for assets in liquidation, resulting in a period of renegotiation. It is critical to understand that,
while potential purchasers remain visible, concerns about asset valuation have emerged. The predicted
asset valuation, which was expected in February, has diverged significantly, with a conservative
estimate indicating a 15% departure in asset value realization. Furthermore, there was a notable shift
in buyer dynamics, with the number of expressions of interest submitted dropping from ten to six,
indicating a distinct shift in market dynamics.14

Additionally, regulatory developments and government policies play an important role in shaping the
stressed asset market. Reforms to the insolvency and bankruptcy framework can improve asset
recovery processes, giving investors more certainty and confidence (Ministry of Finance, 2019).

RECOMMENDATIONS
For a separate market for stressed assets, the author proposes the following suggestions that can be
implemented to ensure

o Clear definition to classify Stressed Assets: There is a need for a system that can give a
clear definition of what constitutes a stressed asset to ensure consistency. This would not only
aid investors in a possibly good acquisition but would also give awareness regarding the liability
to the investor of such assets.
o Timely Resolution and body for stressed assets: As mentioned before, one of the most
important additions that is needed in the insolvency process is to have a is needed in the
insolvency process is to have a straightforward and timed process. By doing so it ensures that
resolution of stressed assets to ensure timely repayment of dues to creditors. This can be
ensured by wider use of the Pre-packaged insolvency method. In this method, a restructuring

13 Jyoti Prakash Gadia. Resurgent India. (2020). [Financial and Operational Creditors’
Rights](https://resurgentindia.com)
14 Suresh P. Iyengar, ‘Stressed Assets. IBC resolutions on the road to nowhere’ (Businessline, 26 February

2023)<https://www.thehindubusinessline.com/specials/corporate-file/ibc-resolutions-on-the-road-to-
nowhere/article66553204.ece> accessed 13 January 2024
 plan is agreed upon in advance of a company declaring its insolvency between secured
creditors and investors.15 This is widely used in other countries such as the US.
o Introduction of a Pre-package Insolvency System: Because prepackage insolvency
agreements cannot be viewed in public, a system can be implemented in which companies
entering prepackage insolvency can privately invite potential investors to purchase stressed
assets that are not included in the restructuring program. This would greatly benefit the
stressed asset market. A dedicated body can be formed to oversee pre-packaged insolvency
cases and facilitate transactions with private investors.
o Establishment of a Specialized Regulatory Body: Setting up a specialized regulatory body
to oversee the stressed asset market would ensure better governance and facilitate smoother
transactions. This body would work on enhancing transparency and maintaining investor
confidence by monitoring the implementation of insolvency laws and regulations.
o Encouraging Public-Private Partnerships: Using public-private partnerships (PPPs) to
manage and resolve stressed assets can increase private sector efficiency while maintaining
public sector oversight. This collaboration can also help to pool resources and expertise,
resulting in better outcomes. PPPs can promote economic growth and innovation by
combining the strengths of both sectors. Additionally, they can improve trust and
accountability in the resolution process. For example, NARCL (National Asset Reconstruction
Company Ltd.) and IDRCL could enter into an exclusive agreement whereby IDRCL will
support NARCL throughout the entire process to ensure that acquired assets are resolved in
the best possible way. This will involve figuring out the best resolution plan in accordance
with the RBI framework, filing for Chapter 11 bankruptcy under the Insolvency and
Bankruptcy Code of 2016, enforcing security interests through liquidation, selling assets at a
slump sale, selling to stressed funds, alternative investment funds, strategic investors, etc. 16
o Improvement of Insolvency Infrastructure: Enhancing the infrastructure of the insolvency
framework, including increasing the number of judges and strengthening the capacity of the
National Company Law Tribunal (NCLT), would reduce delays and improve the efficiency of
the insolvency process.

15 ‘Pre-Packaged Insolvency Resolution Process’ (IBBI)

<https://www.ibbi.gov.in/uploads/whatsnew/a650764a464bc60fe330bce464d5607d.pdf>accessed on 14 January 2024
16
NARCAL, https://www.narcl.co.in/what-we-do/
 o Incentives for Early Identification and Resolution: Providing incentives for early
identification and resolution of stressed assets can help to prevent the accumulation of bad
debts. These incentives could include tax breaks, financial aid, or other benefits for businesses
and financial institutions that address stressed assets early on.

CONCLUSION
The Insolvency and Bankruptcy Code (IBC) represented a significant shift in India's legal-financial
landscape, with a focus on resolving stressed assets and improving credit culture. The IBC sought to
strike a balance between creditors and debtors, but difficulties such as delays in case admission have
been identified. Since its inception, the IBC has maintained a sense of stability in the face of distressed
assets; however, a separate market for stressed assets has been identified. Such a market would enable
strategic investors to select and decide on investments, aided by clear definitions of stressed and
distressed assets. This could help investors balance major liabilities with major haircut schemes,
potentially ensuring the survival of many businesses during insolvency. The paper discussed the IBC's
history, processes, and the distinction between stressed and distressed assets, as well as the impact on
creditors, investors, and the economy as a whole, particularly in light of the COVID-19 pandemic. A
separate market for stressed assets was recommended, with a focus on clear definitions, timely
resolutions, and the use of pre-packaged insolvency methods to improve transparency, efficiency, and
investor confidence. Addressing the complexities of stressed assets necessitates a strong regulatory
framework, strategic management, and proactive investor response. The references and citations
provide a comprehensive view of the subject by incorporating insights from reputable sources and
industry experts. Implementing these recommendations and effectively leveraging regulatory
frameworks will allow stakeholders to navigate the challenges posed by stressed assets while also
capitalizing on opportunities for economic growth and resilience. Despite the coherent approach and
good choice of theme, the paper could benefit from including case law to back up assertions, updating
situations that have changed, and providing a detailed analysis of the new insolvency regime's impact
on creditors and investors.