Reserve Bank Deputy Governor M Rajeshwar Rao on Saturday pitched for an enforceable code of conduct for the Committee of Creditors (CoC) under the insolvency resolution process.

While emphasising that the Insolvency and Bankruptcy Code (IBC), which was introduced in 2016, has gained significant traction as a recovery and resolution mechanism, Rao also said significant improvements are needed with respect to the area of CoC.

CoC has a key role in implementing the corporate insolvency resolution process under the IBC.

At a conference in the national capital, Rao said there have been instances where the CoC's performance has been found lacking in several aspects.

"This includes disproportionate prioritisation of individual creditors' interests over the collective interests of the group, disagreements among the CoC members on approving the resolution plan due to concerns about undervaluation and perceived lack of viability, disagreement over the distribution of the proceeds," he said.

Even when the resolution plan is agreed upon, Rao said there have been instances of non-participation in the CoC meetings and a lack of effective engagement, coordination or information exchange among the members.

According to the Reserve Bank of India (RBI) Deputy Governor, nominees of financial creditors in CoC are entrusted with responsibilities that far exceed their actual authority.

"It is in the larger interest of the creditors that issues related to the conduct are addressed by the members themselves without waiting for the regulatory prescription...," he said.

When incentives are not perfectly aligned, deviations from best practices become the norm, he said, adding that "we need an enforceable code of conduct for the CoC".

"Ideally, IBBI (Insolvency and Bankruptcy Board of India) should have the powers to enforce norms for the conduct of all the stakeholders under the IBC process," he said.

Rao also touched upon the role of insolvency resolution professionals who have a lot of operational responsibilities, and in many instances, he said, the resolution professionals do not enjoy the cooperation of other stakeholders to discharge their duties.

Mentioning incentivising resolution professionals, Rao said compensation should be determined by the market based on commercial considerations.

The RBI Deputy Governor also made various suggestions to further improve the insolvency resolution process, including addressing delaying tactics used by corporate debtors and having a better understanding of the reasons behind defaults.

He emphasised that the real success of a formal insolvency process lies in its role as a deterrent rather than based on its use.

Till March 2024, around 28,000 cases involving an outstanding default amount of Rs 10 lakh crore were withdrawn prior to admission, he noted.

IBBI Chairperson Ravi Mital said it will be introducing certain things related to mediation pertaining to the insolvency resolution process.

Discussions are going on to have the mediation process option to help in faster resolution of stressed assets.

Rao and Mittal were speaking at a conference organised by the IBBI and INSOL India, an independent body that represents practitioners and other associated professionals specialising in the fields of restructuring, insolvency and turnaround.