IBC - Panacea or Poison?

Series: #TonightsFinNews

Post No.: 3

Topic: IBC - Panacea or Poison?

In this topic we will analyze whether the twin objectives that were behind the establishment of IBC were fulfilled or not. For those who are unaware about what IBC and NCLT is? Go checkout my last post in which I have briefed about both of them. Go Read that article now! To all others let’s get started.

So we are aware that IBC is recovery mechanism for banks and a way out for companies that are deep in debts, to either find a resolution or to entirely shut the company. But, it is not the first or only law of its kind; we have had certain other ways earlier like Lok Adalats,?Debt Recovery Tribunals (DRTs) and the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, which were painstakingly slow and cumbersome processes.

Therefore there were two main objectives behind establishment of IBC the first one being the speedy or time bound recoveries for the banks and the other being value maximization which means that recovery percentage of loan should be more and haircut percentage should be less. Keeping these two points in mind we will understand how IBC has actually performed since its inception in 2016.

Points of Analysis

1.????Acceptance of resolution cases by NCLT: Just like any other case, the petitions that are filed for Corporate Insolvency Resolution Process (CIRP) first are admitted for approval. However it has been widely reported that NCLT had cases that have been pending for admission for over 12 months.

2.????Recovery-Haircut percentage: According to RBI report IBC had a recovery rate of 45% so 1953 cases were referred to IBC involving amount of Rs. 2.32 trillion, of which??1.05 trillion was recovered during fiscal year 2020. But there is a catch if you look closer and remove the top 9 cases; the recovery rate is just 24%. These top 9 accounts were steel accounts where the recovery was good. Now if we analyze data of 2021, 348 companies landed in IBC with Rs 5.16 trillion of debt and only Rs. 2.03 trillion was recovered, which is 39.3% recovery rate. Again if you exclude the top two accounts of sale of Bhushan Steel and Essar Steel to Bamnipal Steel and Arcelor Mittal India, respectively, the recovery rate will fall to 19.7%. Now on a standalone basis the numbers may not look good to you but in comparison IBC recoveries were more than the combined recoveries each year under Lok Adalat, Debt Recovery Tribunal and the SARFAESI Act during 2016-17 to 2019-20.

3.????Liquidation Recoveries: Not all companies that go under IBC are successful in getting resolution; in fact the majority of them doesn’t find a way out and hence are liquidated. Out of 2653 closed CIRPs, 1277 firms, around 48.1%, have ended up with an order for liquidation. The total outstanding amount here is Rs 6.47 trillion, but the assets are valued at only 46000Cr. Not just the recovery rate is low here but also the finalization time is more. As of December 2020, around 69% of the liquidations had been going on for a period of more than one year; 26% of them for a period of more than two years.?This is also one of the reasons why banks are accepting huge haircuts on resolution plans and avoiding the liquidation route.

4.????Resolution Time: ?The timing is of essence in any resolution process. The more it takes time the more the asset deteriorates, hence low recovery. The timeline set for IBC resolution process is 270 days however it is more honored in breach than in its observance. According to IBBI, in the case of 79% of all ongoing bankruptcy proceedings, the 270-day time frame have been breached, of the total 4,300 odd cases that have been admitted to IBC since fiscal year 2017, only 8% have been resolved, and nearly 40% cases are still pending.

5.????Resolution Professional Crisis: RPs bear a lot of responsibility that come with many risks; they are personally liable for decisions taken in a resolution. There are instances where RPs have been penalized or debarred for unethical conduct, so more are wary of taking on contentious cases now than before. It is also important to note that RPs individually cannot manage such large companies and assets on their own they need entire team for smooth operations and pitching to right buyers. Despite the work involved, there has been a drastic reduction in fees being paid to RPs. In a case like Essar Steel, the RP and his support team could have billed close to a crore of rupees a month; today, an asset of that size would only be allowed a fourth of that value.

To conclude IBC is far away from its expectations but it is still better than earlier regimes. IBC is definitely not a poison but is it a Panacea? As of now not really. IBC is still work in progress and hopefully as the law matures further and the right infrastructure is in place we will witness better recoveries in a time bound manner.

There is so much more that can be discussed, please hit the comment section and take the discussion forward. Please Like, comment and share, if you enjoy reading these articles.