Recovery for toxic asset resolution financial creditors under the Insolvency and Bankruptcy Code (IBC) amounted to just 10.7% of their admitted claims in the June quarter. It barely improved from a record low of 10.2% between January and March, and posted the second-worst quarterly performance since the IBC’s inception in 2016.
Poor performance, often blamed on an inordinate delay in resolution, reinforces the need for urgent reforms to resuscitate the insolvency ecosystem and deliver on the IBC’s promise to rescue troubled businesses on time to prevent the erosion of value.
According to data compiled by the Insolvency and Bankruptcy Board of India (IBBI), realization for financial creditors reached 1,145 crore between April and June, against admitted claims of 10,697 crore (see chart). However, if it is of any consolation, the rally in the June quarter was 145% of the companies’ liquidation value; in the March quarter, it fell below liquidation value for the first time.
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Thanks to sustained below-normal realization over the past three quarters, the cumulative recovery for lenders where resolution has occurred has fallen to just 30.6% through June 2022, from 32.9% through June 2022. in March and by 35.9% through September 2021. Analysts attributed the weak recovery to the decline in market appetite for distressed assets in the wake of the pandemic – in addition to an excessive lag in resolution, caused by protracted legal wrangling and bottlenecks in the justice system.
It is important to note that the resolution of four of the top five cases that contributed substantially to the collapse of the recovery in the June quarter took 2-3.5 years to materialize. In contrast, the IBC sets a time limit of 180 days to resolve stress in a business, which can be extended for an additional 90 days with the approval of the NCLT. Unsurprisingly, this only confirms the fact that excessive delay erodes value.
For example, recovery for financial creditors of Rohit Ferro-Tech was only 11.8% of admitted claims of `4,221 crore (resolution took two years). In the case of Indolsolar, the realization was only 4.3% of these claims of `2,185 crore. Similarly, for BVV Paper Industries, recovery was only 1.8% of claims of `1,042 crore. In both cases, the resolution took place after three years. Given that approximately 61% of distressed companies that are subject to resolution have exceeded the 270-day limit and an additional 10% have exceeded 180 days, the prospects for recovery of these assets are far from certain. brilliant. , analysts said.
Certainly, recovery in all of these cases does not include the cost of the CIRP (corporate insolvency resolution process), and many likely future realizations such as equity, corporate and personal guarantee proceeds, funds infused into troubled businesses, including capital expenditures by resolution claimants and recovery of cancellation claims. Once these are taken into account (for which data is not available), the overall achievement may seem better. Yet the 10-11% recovery for financial creditors remains meager by any measure.
Of course, analysts said IBC’s performance shouldn’t be judged on the basis of recovery in any particular quarter, but they were unanimous in blaming the clogged NCLT (National Company Law Tribunal) system. ) for the resolution delay. This not only erodes asset values, but also discourages serious suitors from bidding for insolvent companies for fear of losing if the process drags out.
A bill to amend the IBC, aimed at speeding up resolution, among other things, was not introduced in the monsoon session of parliament. Despite the appointments of new members in recent months, various benches of the NCLT face severe staffing shortages. Although the IBBI has introduced a series of regulations to reduce delays, these may not be enough unless competent authorities strengthen the arbitration system, analysts have warned. Of course, according to the IBBI, an overwhelming number of “dead cases” regarding the old BIFR regime have also contributed to the high haircuts so far. Of 514 troubled companies that were rescued by resolution through June and for which data is available, as many as 175 have either transferred from the old BIFR regime or disappeared, according to the IBBI. Additionally, the timing of when a case is referred to the CIB for resolution is critical.
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