Insolvency law to have positive impact on corporate bond market: Sebi chief Ajay Tyagi

To a question about having insolvency professionals as administrators for cases, Tyagi said that since there are a lot of cases where recovery is due, he would go back and look at that.

Sebi Chairman Ajay Tyagi on Monday expressed hope that positive impact of the insolvency law will be visible on the domestic corporate bond market in five years. Describing the Insolvency and Bankruptcy Code (IBC) as a “landmark reform” in the country’s economic history, Tyagi said the Code has brought in behavioural changes among corporate debtors. The Code came into force in December 2016.

“IBC has been a landmark reform that has successfully empowered creditors by increasing their recoveries, improved their debtor discipline… there is scope for further improvement,” Tyagi said here. According to him, reforms in bankruptcy laws leading to bolstering of creditor rights have generally been found to have a positive impact on corporate bond markets owing to increased investor confidence in the markets.

“In case of three BRICS countries — Brazil, Russia and China — the five-year average of outstanding corporate bonds to GDP ratio after implementation of bankruptcy reforms have nearly doubled compared to five-year average of outstanding corporate bonds to GDP ratio prior to implementation of the reforms.”While there is a positive correlation between recovery rate, recovery timeline and corporate bonds to GDP ratio, experiences also show that there is a time lag between implementation of bankruptcy laws and effect on bond market to the extent of 5-10 years,” he noted.

Considering that many financial service providers deal with substantial client firms and are or systematically important, “a separate, clear and appropriate resolution, bankruptcy and liquidation framework for financial service providers is the need of the day,” Tyagi said. He hoped that the FRDI (Financial Resolution and Deposit Insurance) Bill being contemplated will address this gap.

Last month, the corporate affairs ministry issued a notification specifying the categories of financial service providers that can be taken up for resolution under the “generic framework” of the Insolvency and Bankruptcy Code. Later, the Reserve Bank referred crisis-hit DHFL for resolution. The introduction of the “generic framework” comes against the backdrop of the ongoing liquidity crisis in the non-banking financial companies (NBFCs) that has also sparked concerns about overall stability of the financial sector.

To a question about having insolvency professionals as administrators for cases, Tyagi said that since there are a lot of cases where recovery is due, he would go back and look at that.”Sebi was given recovery powers in 2014 and our progress has been quite unsatisfactory in house. There are many cases, I don’t want to name, ponzi, collective investment scheme cases where large number of investors and significant amounts were involved… some of the cases went to court,” he said Tyagi was speaking at a conference on ‘Insolvency and Bankruptcy Code, 2016: Impact on Markets and the Economy’.