Many improvements, but still some way to go
Thought passed by the Parliament in May 2016, the Insolvency and Bankruptcy Act (IBC), picked up momentum only when RBI recommended 12 significant cases for IBC.
The first case of the substantial takeover was Bhushan Steel, wherein Tata Steel bought it in the resolution process for ₹32,500 crore with a 60 per cent haircut by lenders. Over time, the government tried to proactively make changes to the code to uphold the spirit of the code. One such amendment was the introduction of Section 29A to stop defaulters/defaulting promoters from bidding for companies undergoing the resolution process. Another was giving home buyers the status of a creditor. If implemented, the code, as intended, will be a major milestone for the Indian landscape.
However, it has its fair share of shortcomings as of date. The key highlights, both positive and negative, are shown below:
Hits
The code has succeeded in deterring the defaulting corporates and thereby enforcing financial discipline; defaulting companies are taking steps to avoid the IBC and losing control. The IBC regime indicates a significant improvement in recovery for financial creditors. It has an average recovery rate of 40-45 per cent in notable cases. The earlier recovery rates were much below at about 25-30 per cent. The process has taken more than 180 days, and with 90 days extension, 270 days as stipulated in the code. Part of the delay in resolution can be attributed to the absence of buyers and the differences between members of the committee of creditors. The joint lenders or the consortium are often overburdened by the NCLT and NCLAT and the challenges posed by promoters who are unwilling to lose control of their companies. In addition, the Covid-19 global pandemic for more than the last year-and-a-half has also contributed to a substantial delay in the process of resolution, besides adding to more stressed assets. Still, the time taken is far better than the average 4 to 4.5 years earlier. The future will be better as the current cases include the hold (BIFR) cases. The goal of IBC is an early resolution with maximisation of value as envisaged in the code, besides revival of sick units. Though it is struggling to achieve the same, it has not entirely failed.
Misses
When the bankruptcy code was brought in, there was much hope that it would revive companies, recover public money and protect jobs. It has undoubtedly given an effective tool to recover loans but has not lived up to the expectations of a time-bound recovery, except for particular big-ticket hits. The view is also gaining ground that valuable companies are being bought over at low prices, leading to haircuts for banks in some cases, even over 90 per cent. Also, there are cases where defaulting owners get back their companies cheap. Lack of expertise among resolution professionals to perform the complex task of reviving a company that has gone sick or substantially sick. RPs often do not have the expertise to run companies as a going concern. The bankruptcy code was something in need of the hours, and after years of discussion, it came into existence. Five years on, it is still in progress and needs considerable changes, both in the code and its implementation and, above all, the mindset of the creditors, particularly financial creditors. The author is Partner, Bhuta Shah & Co LLP
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