After two disappointing quarters, recovery for creditors from the resolution of stressed assets under the Insolvency and Bankruptcy Code (IBC) improved in the three months through September and stood at 30.2% of their admitted claims, according to the data compiled by the insolvency regulator.
The recovery for financial creditors alone had hit a record low of 10.2% in the March quarter and 10.7% in the June quarter.
Although the latest data include the realisation for both financial and operational creditors, they suggest an improvement in the recovery for financial creditors as well, as these lenders account for an overwhelmingly large share of admitted claims of all creditors.
Nevertheless, the realisation in the September quarter still remained below the medium-term average. Cumulative recovery until September (since the IBC came into being in 2016) dropped to 30.8% from 35.9% a year before.
Analysts have repeatedly blamed reduced market appetite for stressed assets in the aftermath of the pandemic — on top of the inordinate delay in resolution, caused by protracted legal tussles and bottlenecks in the adjudicating system—for the dismal recovery in recent years.
Importantly, 131 applications in respect of avoidance transactions to the tune of Rs 36,701 crore have been pending before the National Company Law Tribunal (NCLT). The IBC has empowered resolution professionals to reverse any transaction undertaken by the corporate debtor before the law is invoked if they feel the transactions were intended to divert funds or alienate assets. But such claims have to be endorsed by the NCLT.
According to the data compiled by the Insolvency and Bankruptcy Board of India (IBBI), the realisation for financial creditors hit Rs 3,054.4 crore in the September quarter, against the admitted claims of Rs 10,121. 5 crore. The cumulative recovery from toxic assets where resolution took place stood at Rs 2.43 trillion until September, which was above their liquidation value of Rs 1.37 trillion.
Interestingly, the IBBI data also showed that the realisation was as much as 84% of the fair value of the stressed firms in 456 of the 517 cases where corporate insolvency resolution process took place until September.
Importantly, resolution in 10 of the 23 stressed firms during this quarter took more than two years to take place. The IBC sets a time-frame of 180 days to resolve stress in a firm, which can be extended by another 90 days with the NCLT approval. Unsurprisingly, this just corroborates the fact that inordinate delay is leading to value erosion.
The bottom five firms that fetched worst returns (in percentage terms) for the creditors were Megha Granules, Sri Lakshmi Srinivasa Jute Mills, Surya Exim, ALM Metals & Alloys and Victory Vision Home Appliances. The recovery in these cases were between 8% and 18%. The top five firms that witnessed decent recovery were Starlite Infracon (86.3%), NRS Projects (70.2%), DHSL Textiles India (56.4%), RK Jain Construction India (44.1%) and Rajahmundry Godavari Bridge (42.8%).
Since 50% of stressed firms that are undergoing resolution have exceeded two years, chances of a good recovery in these cases are far from bright.
To be sure, the recovery in all these cases does not include the CIRP (corporate insolvency resolution process) cost, and many probable future realisations such as equity, proceeds from corporate and personal guarantees, funds infused into the stressed firms, including capital expenditure by the resolution applicants, and recovery from avoidance applications. Once these are factored in (for which data are not available), the overall realisation may look better.
A Bill to tweak the IBC, aimed at expediting resolution, among others, is expected to be introduced in the upcoming winter session of Parliament. Despite the appointments of new members of late, various benches of the NCLT still face a shortage of strength. While the IBBI has introduced a raft of regulations to cut delays, those may not suffice unless relevant authorities bolster the adjudicating system, analysts have already cautioned. Of course, according to the IBBI, an overwhelming number of “dead cases” (35%) pertaining to the earlier BIFR regime have also contributed to the elevated haircuts so far.