The Insolvency & Bankruptcy Code (IBC) has been touted as a major reform to tackle rising corporate stress in India. This five-year-old Code has enabled resolution of some high-profile corporate insolvencies such as Essar Steel or Monnet Ispat but has also faced criticism for less-than-optimal outcomes. Take the case of the very first resolution of a corporate insolvency under IBC in 2017. Creditors to Synergies Dooray Automotives realised just about ₹50 crore of the nearly ₹1,000 crore outstanding debt. And though the amount finally realised from resolution of this company was about six times its liquidation value, it was only a fraction of what was owed to creditors. In the Essar case – the largest and the most litigated so far – 83 per cent of financial creditors’ nearly ₹50,000 crore claims were realised but in the Monnet case, only about a fourth of the admitted claims worth ₹11,000 crore were realised. So FCs of Ispat took a haircut of nearly 75 per cent.
In another high-profile insolvency case, of DHFL, financial creditors took a nearly 57 per cent haircut and could get back only about ₹37,000 crore against admitted claims of over ₹87,000 crore. Since December 2016 when IBC came into force, 4,541 companies have been admitted for resolution. But at least 30 per cent of these have had to be liquidated during this period for various reasons. Latest quarterly data from the Insolvency & Bankruptcy Board (IBBI) show that as on June 30 this year, over 1,300 companies were liquidated. Also, the total realisable value for financial creditors of these 4,541 companies till date has just been about a third of the admitted claims. This means lenders have had to take significant haircuts for resolution plans to fructify.
Now, a working group constituted three years back to track the outcomes of IBC has come up with a set of recommendations about ways to improve the implementation of the Code. This working group was chaired by former SEBI chairman G.N. Bajpai and among its members were economists Ajit Ranade and Roopa Purushothaman and the MD & CEO of CMIE, Mahesh Vyas.
The biggest takeaway from the working group’s suggestions is the virtual data hole within which the IBC has been operating till now. There is no dashboard of real-time data for a quick reference on the performance of the insolvency process; no data on time, cost and recovery rates under the IBC and none to facilitate a comparison of how the insolvency resolution process has been performing vis-à-vis macro-economic indicators.
As of now, whatever data pertaining to corporate insolvency exists is available only with the IBBI and the regulator publishes some parameters once a quarter in the form of a newsletter.
All the stakeholders – resolution professionals (RPs), promoters of stressed companies undergoing resolution and creditors – have often lamented the lack of credible data in assessing the efficacy of the IBC process. Take for example the inordinate delays in resolution, which are leading to value erosion. Nearly every third company admitted under the Code since its inception in 2016 has faced liquidation; three in four admitted cases have dragged on for more than 270 days, the deadline by which resolution should be concluded. The value of the stressed asset buyers coming forward to purchase continues to diminish as delays mount; it also diminishes when the lenders and other stakeholders do not help a struggling company in continuing to do business while also being under IBC. While all these factors are well known, there is little data available to conclusively prove value erosion of companies under IBC whose resolution drags on.
This, despite ample evidence already available about inordinate delays. An average IBC case takes 460 days or nearly 15 months for resolution now, a far cry from what the IBC initially envisaged – 180 days – for resolution of stressed companies and later stretched to 270 days, with 330 days being the “outer limit” for completing a resolution.
So the working group has rightly emphasised the need for reliable real-time data, saying this is essential to assess the performance of the insolvency process: “IBBI has made commendable efforts in publishing quarterly data on the insolvency resolution process in detail. IBBI can also consider including quantitative data on cost indicators such as court/bankruptcy authority fees, RP’s (resolution professional) fees, asset storage and preservation costs etc in its quarterly updates in line with international best practices.”
It has suggested various activities for building an insolvency database. Fr example, one suggestion is about analysing assets of the CD, both before the resolution process has been started and after its completion and also assessing CD’s enterprise value (market cap plus debt) and the capital structure of the resolved entity. “Once a time series data of such indicators is available, it is possible to study the effect of various events and actions on the valuation. It is possible that such impact can be seen only with a lag but nevertheless, it would be useful to see the changes in the value of assets over time as this could facilitate the measurement of possible maximisation of value of assets of the CD,” the working group report has noted.
The working group has made some valuable suggestions on ways of improving outcomes under IBC and the government would do well to listen to this sage advice.