Quo Vadis IBC?

Seven years is perhaps not an appropriate time to call the jury out on the evolution of an institution. Yet the rumblings from the establishment suggest some element of discomfort with the trends and progress in the Indian Insolvency and Bankruptcy process.

Speaking at the sixth annual day celebrations (last year, in 2022, mind you) of the Insolvency and Bankruptcy Board of India (IBBI)—established on October 01, 2016—Union Finance Minister, Nirmala Sitharaman is quoted by the Hindu as saying: "the country could not afford to lose the “sheen” of its insolvency law, the Insolvency and Bankruptcy Code (IBC).” She specifically flagged off two items of concern:

• IBC numbers have shown long delays in cases and
• banks having taken deep haircuts on their outstanding claims.

On haircuts, she said it was unacceptable that banks should take a hefty haircut on loans that go through the resolution process, adding that a 95% haircut could not possibly be the “best resolution” the IBC had to offer, even if some companies came in such a bad state that only ‘junk value’ could be derived.

However, the 2023 annual day celebrations had no room for such brooding. The Economic Times quotes IBBI chairman Ravi Mittal citing the three-fold jump in market capitalisation of IBC-resolved companies, from Rs 2 lakh crore to Rs 6 lakh crore. Mittal also noted the IBC platform directly facilitated the recovery of more than Rs 3 lakh crore through the resolution of various cases. Indirectly, it has led to a decline in bad loans in the banking system, which stood at a decadal low of about 3.9% as of March 2003.

These are valid observations and call for celebration. Table 1 reports IBBI data on the macro trends in CIRP evolution till March 2023 [1].

 

While 677 CIRP plans were closed upon approval of resolution plan (Row A3), three times the number (2030) were closed by liquidation (Row A4). We may just note in passing that CIRP plans closed by resolution had a better average realisation of 31.8% (Row B2) as against 7.0% in the case of liquidation cases.

Viewed against the preamble of the IBC 2016, this table suggests the objective of “maximisation of value of assets” is far from realised. The resolution of endemic delays in CIRP closure is WIP; Ministry of Corporate Affairs (the parent ministry of IBBI) secretary Manoj Govil has argued the insolvency eco-system needs to be beefed up to handle the resolution of about 1,000 cases a year--more than three times of what is being expected to be resolved in FY24.

Be it as it may, perhaps we could spend some time on inner dynamics behind the topline numbers.  We analysed the full database of 724 CIRP cases ‘yielding resolution’ (hereinafter “resolved”) since inception of IBC to end of the quarter ended June 2023. These include the 678 cases reported resolved till March 2023[2] and 46 cases reported in the April-June 2023 period[3]

Of these, 33 entries had missing data and had to be dropped, leaving 691 valid entries, leading to resolution of knotted credit of approximately Rs nine lakh crore (Rs 9,23,385.39 crore, to be precise). Credit totalling Rs three lakh crore (Rs 2,92,182.29 crore) was resolved and revived, yielding 31.6% value. Figure 1 tells a good story.

Figure 2 confirms the highly positive skew of admitted claims, exceeding Rs. 10,000 crore.

The top ten CIRP cases (by admitted claims) are reported below.

In this sub-sample, realisable values range from a high of 88% for Jaypee Infratech to a low of less than one per cent for Lanco Thermal Power.

Over the full sample of 691 resolved cases, realisable value as a percentage of admitted claims ranges from a high of 136% for Trinity Auto Components to a low of 0.05% for Jaihind Infra Tech Projects.

Perhaps there is a point to be made about the banking system’s lack of oversight which led to this deterioration of asset value in the run up to insolvency, but we cannot speculate. Obviously, no one is asking the tough questions.

To IBC, for a holy dip