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Delay, thy name is IBC: Insolvency framework is fast losing credibility, needs a booster dose

The recovery ratio for creditors has hit a record low of just 10.2% of admitted claims in January-March 2022. This is the second consecutive quarter of disappointing numbers—realisations in October-December 2021 were just 13.4%.

IBC
The newsletter reports that 29 corporate insolvency resolution processes (CIRPs) concluded with resolution plans during January-March 2022.

Recovery falling below even the liquidation value of assets admitted under the Insolvency and Bankruptcy Code (IBC) process shows why the IBC ecosystem desperately needs fixing. As this newspaper reported on Friday, the recovery ratio for creditors has hit a record low of just 10.2% of admitted claims in January-March 2022. This is the second consecutive quarter of disappointing numbers—realisations in October-December 2021 were just 13.4%. While it is true that IBC’s performance shouldn’t be assessed based on the data of a couple of quarters and the size of realisations shouldn’t be the primary yardstick, the fact is that the overall realisations since the IBC came into effect are modest at 32.9%.

Bidders for banks’ toxic assets are shrinking as the pandemic has beaten down potential buyers’ appetite, but factors like a large chunk of “dead cases” from the Board for Industrial and Financial Reconstruction regime etc have contributed too. The delays and bottlenecks resolution cases face at the National Companies Law Tribunals (NCLTs) have worsened the situation. A shade over two-thirds of companies undergoing resolution, as per the Insolvency and Bankruptcy Board of India (IBBI), have exceeded the 270-day deadline set by the Code for resolution. The delays not only directly contribute to value erosion, they also deflate buyer enthusiasm over the IBC process. Take the example of Jaiprakash Associates. Although filed under IBC way back in September 2018, the case is yet to be admitted. Even Jaypee Infra, directed to the IBC by RBI, is yet to see resolution almost five years after it was taken to court. The timeline for admission was 14 days when IBC came into force.In many cases, the delays give the promoters enough time to divert funds and empty the company’s coffers even as banks helplessly watch an asset losing its value. A large part of the problem is inadequate strength at the NCLTs. Against the sanctioned strength of 63 across 15 benches, a reply to an RTI query showed that there were just 22 judicial and 25 technical members. With a slew of retirements due this year, the IBC process is likely to get beset by further delays. There is also the problem of shorter tenures being granted to many members, and the reluctance of the government, in a few cases, to grant extensions even when these members were eligible for this.

It is not just the NCLT that is throwing a spanner in the works. Even the committees of creditors (CoCs) are not acquitting themselves well when it comes to speed. As former IBBI chairman MS Sahoo and CKG Nair pointed out in a recent column in this paper, commercially-wise CoCs should be able to identify firms for liquidation by the 30th day of the corporate insolvency resolution process (CIRP). But, 255 CIRPs that ended in liquidation in April-December 2021, took, on average, 615 days. Indeed, while a majority of the CIRPs that run the full course should have ended in rescue of the firms involved, 76% of those that ran the full course ended in liquidation. Clearly, value-erosion because of delays can’t be the NCLT’s fault alone. Given that in many cases, it was lending without due diligence that landed banks in the bad-assets soup, such delays seem unpardonable. To prevent any collusion between lenders and potential buyers, a code of conduct is needed.

The IBBI has proposed to make it obligatory for the CoC to share all the documents related to a stressed firm with the insolvency resolution professional. It has also mooted fixing deadlines for the preparation of the information memorandum and the completion of the valuation exercise. These, if implemented, would be important steps forward. The fact is IBC may end up in the same club as its predecessors in India’s resolution history if the time delays at the NCLT level are not fixed. The credibility gap needs to fixed—immediately.

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