The erosion of value of stressed firms before the initiation of the corporate insolvency resolution process (CIRP) is “a matter of concern”, corporate affairs secretary Rajesh Verma said on Friday.
Still, creditors have been able to recover more than 180% of the liquidation value of the corporate debtors where resolution has taken place, Verma said at a CII event. In fact, more than 30% of the firms that have been rescued under the Insolvency and Bankruptcy Code (IBC) were not even going concerns, the secretary said, as he called the five-year-old IBC a piece of landmark legislation.
Commenting on complaints about the conduct of the committee of creditors (CoC) in certain cases, Verma said his department is working with the Reserve Bank of India, the department of financial services, the Indian Banks’ Association and others on the issue. The insolvency regulator, IBBI, too, has initiated a raft of initiatives to sensitise the CoC, he added.
The secretary’s assertions came after the Parliamentary Standing Committee on Finance earlier this month said in a report that the IBC seems to have deviated from its original objectives, thanks to inordinate delay in resolution and the low recovery rate, with haircuts running up to 95% in a few cases. It also suggested that a professional code of conduct for the CoC be put in place, “which would define and circumscribe their decisions, as these have larger implications for the efficacy of the Code”.
Verma said, until July 2021, 4,570 cases were admitted for resolution, out of which 404 cases were resolved, which fetched `2.5 lakh crore, while 1,371 headed for liquidation. But 17,837 insolvency cases, involving claims of as much as `5.5 lakh crore, were disposed of at the pre-admission stage itself, he added. Some analysts have also pointed out that the mere threat of the IBC by creditors has facilitated recovery of dues in most cases, leading to the withdrawal of insolvency applications before the actual proceedings start at the NCLT.
“That is the strength of the IBC, that is the change in behaviour (among debtors) that the Code has brought about,” Verma added.
The Code has also improved India’s ranking on the “resolving insolvency” parameter of the World Bank’s ease of doing business index–from 136th in 2017 to 52nd in 2020. The recovery also went up from just 26% in 2017 to 71.6% in 2020, he added. On an average, the time taken for recovery also dropped from 4.3 years in 2017 to 1.6 years in 2020.