The World Bank, which assesses different 200 economies in terms of ease of doing business, has a parameter on resolving insolvency. In terms of that parameter, India's rank has improved from 136 to 52 in the past three years of its implementation, the next two years do not have data, last year World Bank did not come up with the data and this year it is expected in October.
The Insolvency and Bankruptcy Code was hailed as a game changer for the bad loan resolution landscape in India. As the IBC has completed five years of its existance, some serious questions arise. One, has it led to higher recovery? Two, is it helping resolve bad loans in a time-bound manner? And three, does it remain the best tool to resolve bad loans?
The latest update from the IBBI shows that of the 4,500 odd cases that have been admitted into the NCLT so far, nearly 63 percent have been closed, and 38 percent are still ongoing. But out of these, only about 14 percent have been resolved so far, and nearly half have ended up in liquidation. When we talk about liquidation, it is also very important to note that 75 percent of these cases, which ended up in liquidation were already sick or defunct, and therefore, the chances of recovery were anyway lower, to begin with.
Some recent incidences of large haircuts by lenders have cast a shadow on recovery under the code.
Recovery by financial creditors under the code fell to about 36 percent cumulatively, from nearly 39 percent in the previous quarter. It rose over the previous year when IBC had remained in suspension, although it is lower than the levels that were on March 20. Does it remain the best tool for recovery? This is the question everyone is asking.
And it certainly does seem so when one compares it with the other tools of resolution like DRT or SARFAESI or Lok Adalats.
The other key area of concern has been the long delays, in what was supposed to be a time-bound resolution process above everything else. 180 days was the ideal target and up to a maximum of 330 days.
Here's what data shows
75 percent of the ongoing cases have already exceeded 270 days and took more than 400 days on average. So in summary, while there is a lot left to be desired when it comes to the code, experts believe IBC has put control back in the hands of the lenders, improved credit discipline.
What has worked and what hasn't
CNBC-TV18 caught up MS Sahoo, Chairperson, the Insolvency and Bankruptcy Board of India, to get a deeper insight into the contours of the code to assess what has worked, what hasn't, and what to come.
With regards to recovery, what has really gone wrong? Is the court to blame? Or, five years on from the spectacular success of Essar Steel, Bhushan steel to now Videocon,
is it the time for a review and redesign of the code?
Sahoo said, "I think you have to look at the code from his entire perspective. What it has achieved in the span of the last five years. It has revolutionised the insolvency resolution process. It has done so many several other things starting from rescuing the companies from financial stress providing freedom of exit, enabling the creditors to realise their dues, releasing the entrepreneur and assets for efficient uses."
"The outcome of the law in the list of achievements is quite long. It has established the supremacy of the markets and rule of law insolvency resolution process and professionalised the insolvency resolution process."
It's not surprising that the World Bank, which assesses different 200 economies in terms of ease of doing business, has a parameter on resolving insolvency. In terms of that parameter, India's rank has improved from 136 to 52 in the past three years of its implementation, the next two years do not have data, last year World Bank did not come up with the data and this year it is expected in October. So, absolutely nothing has gone wrong except in terms of time, said Sahoo.
On recovery concerns, he said please look at the objective of the code. "We expect the code to be panacea for so many appeals, but we should remain focused on what the code started to do and what its initial objective was and that was reorganisation. It says reorganisation by to which as attempting to rescue a company through a resolution plan and if that effort fails then go for liquidation.
“So the law provides for two options and it enables a market process and the market has to choose which one is good,” said Sahoo.
If one were to look at some international markets then the United States has chapter 7 proceeding, chapter 11 proceeding, and those proceedings include individuals and businesses are limited only to businesses. The chapter 7 proceeding is essential for liquidation, chapter 11 is essential for reorganisation. Now if one looks at the number of such proceedings commenced in the United States. Two-thirds of the proceedings they start with chapter 7 and 1/3 start with chapter 11. That means even before starting, at the time of the start, two-thirds of the companies that the market has decided to liquidate only they are trying to look with your balance 1/3 of the company whether they can be rescued or not."
"So, we have to look at the objective being reorganisation and two options are reorganisation whether it is working or not, you have to look at whether there is reorganisation that means whether a viable company has been rescued, and unviable company has been liquidated. And if liquidated, or reorganised resolution plan, whether value has been maximised and in what time frame it has been done, and at what cost it has been done," Sahoo said.
Are you arguing that recovery is not the best metric to judge the success of the IBC because you often cite the fact that recovery as a percentage of the liquidation value? Because these companies are already sick? So, does the narrative have to change to stop looking at recovery as a proportion of the claims to a proportion of the liquidation value?
Sahoo said yes, so, please look at the companies - for example, Ghotaringa Minerals and Orchid Biotech - these were the companies where they owed Rs 8,100 crore to banks, when they came to IBC process they had absolutely zero assets and the bankers got only zero rupees.
On the other hand, look at Binani Cements, MBL Infrastructure in these cases, the creditors got 100 percent of their money. Now, please consider why in one case there is zero percent haircut and in another case, there is 100 percent haircut? That means this has nothing to do with the IBC probably - probability the reason lies somewhere else.
So, have to look at when a company comes into the IBC process, what is its state of health as much as the outcome depends at what stage of the disease the patient arrives in the hospital. If the person reaches up very late at the hospital, the best hospital, the best doctors can do very little. The companies that have been rescued when they entered the IBC process, they had assets valued at 22 percent of their claims. That means at the entry the creditors who were staring at the haircuts of 70-80 percent and that has come down to 60 percent or so, but more important is a company has been rescued.
“The outcome has to be seen in relation to the amount of claims or amount of assets available on the ground, the market will not give a value because a company was so much market will give the value on what the company brings on the table and IBC maximises the value of the assets in existence, not probably what existed earlier. So one has to be realistic about what is on the ground? what are the options,” said Sahoo.
When you say it is important when the patient is brought to the hospital then shouldn't the law itself incentivise banks, or bring the companies that have visible problems to the IBC earlier because, in a lot of cases, it is only when problems emerge, defaults have happened, that cases are brought to NCLT and there is little to be done at that point....
Sahoo said, "Yes, we had the insolvency bankruptcy code in 2016. The companies, which are coming today or came in 2016-2017-18. Many of them were defunct or The Board for Industrial and Financial Reconstruction (BIFR) for decades ago. The companies, which are getting liquidated three fourth of them were defunct. So that means, one cannot say that there has been a delay and the banks did not bring because this system became available in 2016."
"Yes, there was initial inertia on the part of the banks to invoke the IBC process that required an amendment in the banking law that required RBI to give directions. But nowadays those things do not arise. What we are dealing with today are essentially legacy matters. Yeah, once the legacy matters are over, the outcomes would look much better."
For the entire discussion, watch the accompanying video