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Has Insolvency Code Tamed The NPA Demon?

A lot has been said about the bad loans in India. The Non-Performing Assets (NPA) rose meteorically since the UPA 2 days given the loose lending by banks. It took an Asset Quality Review in 2015 to unearth the true nature of NPAs which turned out to be 8.5 lakh crore rupees. Since then, the Modi government is working towards recovering the loans and stabilizing the banks. One such major step was the Insolvency and Bankruptcy Code (IBC) passed in 2016.

Under the scheme of things, the creditors (banks and other financial institutions) can take a defaulting company to the National Company Law Tribunal (NCLT) where the judicial process would decide how to recover loans. Most importantly the original code mandated the cases to be disposed in 270 days, which was increased to 330 days. Broadly two methods are seen- Resolution and Liquidation. Resolution means either lessening the amount for payback or allowing other companies to take over the defaulting one. Liquidation entails direct sale of assets in market to recover the loan

But has this been successful? Broadly, the IBC has been much effective than any of the previous loan recovery mechanisms like Debt Recovery Tribunals, Corporate Debt Restructuring Scheme, Joint Lenders’ Forum, S4A, etc.

The quarterly newsletter released by the Insolvency and Bankruptcy Board of India for the quarter ending on 30th September shows a great detail about the work going on under IBC.

Total Cases Filed

The IBC started to be functional since 2017. Thus, for almost two and half years, Corporate Insolvency Resolution Processes (CIRPs) were filed in the NCLT. When we look at the CIRPs filed as on the end of that particular quarter, we find a trend of increasing filings. It reflects the popularity and acceptance of IBC as a legitimate and fast process

These were the cases filed. After screening, the cases are admitted in the NCLT. At the quarter ending 30th September, a total of 2,542 cases have been admitted for either resolution or liquidation.

Sectoral Distribution of Companies

The companies under the process belong to various sectors. It would be interesting to know the sectoral distribution.

Maximum 1,043 cases are from the manufacturing sector. This is not surprising since this sector has been affected the most by policy paralysis of the UPA 2. The government couldn’t issue permissions and licenses in time leading to little business activity in manufacturing sector.Within the manufacturing sector, let us see the sectors where maximum cases are admitted.

Sector Cases Admitted
Basic Metals 183
Textile and Apparel 171
Food and Beverages 128
Machinery and Equipment 118
Wood, Rubber and Plastic 119

Among the other sectors, 500 cases are from real estate sector. This comes in the background of fraudulent practices in real estate (like Amrapali Group) and the clamping of black money in the real estate sector after Demonetization. More than 200 cases are also admitted for companies in construction and retail trading sectors.

Who Has Filed Cases?

Technically, three entities can file cases. Operational Creditors, Financial Creditors and Corporate Debtors.

For us, the first two are important. Operational Creditors are those who have lent to the defaulting company for covering operational expenses like salaries, dues, purchasing of raw materials, inventory management and sales. Financial Creditors are ones who lend money to companies who use the money for capital investment.

Out of the total cases admitted, 1,232 cases were by operational creditors while 1,086 cases were by financial creditors. The operational creditors are dragging companies in NCLT more than financial creditors.

The significance of this is because operational creditors are mainly small-scale industry, MSME and small financial firms. Since the threshold for filing cases is kept as low as Rs 1 lakh, the IBC process is benefitting the small-scale industries for recovering their dues. This is seen from higher cases filed by operational creditors.

Settlement Without Case

Section 12(A) of the code makes provision to withdraw cases if the defaulting company settles its dues to the creditors. In other words, the pressure of legal proceedings forces the defaulting companies to settle claims. Settling claims is preferred over legal proceedings. Now that’s called fear of law!

A total of 116 such cases have been withdrawn under the section. Amount of the claims admitted were mostly up till 10 crores.

But the real story lies elsewhere. There have been out-of-court settlements by defaulters even before cases were admitted in the NCLT! A statement by a government official revealed that more than 3,500 cases were settled outside courts amounting to a recovery of Rs 1.2 lakh crore.

Resolutions Under IBC

If we look at the cases of resolutions, we find that resolution plans have been approved for 156 cases. This includes Bhushan Steel, the company against whom claims of Rs 47,158 crores have been put up.

If we look at the cases resolved, the amount realized by the Financial Creditors is a large sum of 1.37 lakh crores which is 41.53% of the claims. Now you might think if only 41.53% of money is recovered, isn’t it bad? The reality is quite the opposite. RBI report said that the recovery from other mechanisms like Debt Recovery Tribunals, SARFAESI Act, Lok Adalats, etc is barely 12.4%. This shows how IBC has been effective in improving recoveries.

Another allegation has been that under IBC, there are more liquidation than resolutions, meaning entire companies are closing down to repay debt than being given a helping hand. If we look at the total 2,542 cases admitted in IBC as mentioned above, 587 are for liquidation while only 156 are for resolution. Liquidation is almost four times more than resolution.

Nothing can be far from reality. The fact is that out of the 587 cases for liquidation, 427 cases (72%) were earlier with Board for Industrial and Financial Reconstruction (BIFR) or were defunct. What it means is that the economic value of the companies had already eroded before they were admitted in IBC. This leaves no other option than liquidation.

Liquidation Under IBC

Liquidations have progressed well under the IBC. Out of the ongoing cases, a total amount of claims admitted are more than 3.5 lakh crore rupees while the number of claimants is about 20 lakhs. This shows the intensity of the litigations under IBC. Out of the 37 liquidations already completed. The recovery rate is 30.1%, still substantially higher than earlier mechanisms.

The average time for the approval for either resolution or liquidation plans is also considerably less. The average days required to approve a resolution plan was 374, while for liquidation it was 300 days. Compare this with the years of pending litigations under Debt Recovery Tribunals.

Twelve Large Companies

The RBI has notified 12 large companies which had the largest share in the NPAs and dragged them to NCLT either for resolution or liquidation. The total liability of these companies was 3.45 lakh crore, a large chunk of the total NPAs

Out of the twelve, seven companies have undergone resolution while five are under process. The details are as below-

Sr No Defaulter Company Amount Realized (Cr) Realized as a percentage of Claims (%) Successful Resolution Applicant
1 Essar Steel India Ltd 30,030 60.7 Arcelor Mittal India Ltd
2 Bhushan Steel Ltd 35,571 63.5 Bamnipal Steel Ltd
3 Bhushan Power & Steel Ltd 19,350 41.03 JSW Ltd
4 Electrosteel Steels Ltd 5,320 40.38 Vedanta Ltd
5 Jyoti Structures Ltd 3,691 50.12 Group of High Net Worth individuals
6 Monnet Ispat & Energy Ltd 2,892 26.26 JSW and AION Investment Pvt Ltd
7 Alok Industries Ltd 5,052 17.11 Group of companies

Not to mention, the recent judgment of Supreme Court with respect to the takeover of Essar Steel by Arcelor Mittal strengthened the IBC as well as the recent amendments made it impossible for promoters to bid for their own companies.

In a nutshell, the mess of NPAs created by the UPA is in the process of getting resolved. IBC has provided a platform for the banks to pursue defaulters. As late Finance Minister Arun Jaitley had said- Earlier the banks had to run behind the defaulters to recover money, now the defaulters are running behind banks to save their companies!