What does the IBC data tell us about the state of Indian economy?

Even as the economy is sinking into a deeper recession, data shows that the number of companies getting dragged to Insolvency and Bankruptcy Code (IBC) proceedings has been going up significantly over the last few years. This scenario could worsen in the context of COVID-19 onslaught.

“The number of cases admitted for Corporate Insolvency Resolution Processes (CIRPs) over the last 11 quarters has increased significantly, and has been generally increasing every quarter, with a major portion of these cases being admitted over the last eight quarters,” a report by CARE rating which analysed the IBC data showed.

Also, most of the cases admitted to the IBC have been resolved through liquidation, not resolution.

So far, 3,774 companies have been admitted to IBC proceedings on a cumulative basis. Of this, 24 percent cases are closed by liquidation while only six percent cases have been closed through resolution. The manufacturing sector accounts for the highest share at 40 percent of the overall cases, followed by the real estate (20 percent), construction (11 percent) and trading sectors (10 percent). In Q4, the sectors have remained constant compared with the previous quarter.

Half of the initial 12 large cases resolved

Of the total 12 cases that were directed to the Insolvency and Bankruptcy Court by the Reserve Bank of India (RBI) in 2017, a resolution has been arrived at in six cases while liquidation orders were passed against two companies. In two companies, resolution has happened but banks have not received payment. Beside, in the case of another company, the resolution plan failed and hence the process has been restarted, a report by CARE rating agency said.

The six companies that had found a resolution are Electrosteel Steels, Bhushan Steel, Monnet Ispat, Essar Steel, Alok Industries and Jaypee Infratech. In Jyoti Structures and Bhushan Power and Steel, resolution happened but payment is yet to be received.

Against the admitted amount of Rs 236,907 crore, the creditors realized Rs 113,076 crore from these eight firms. Only in the case of Jaypee Infratech, the creditors managed 100 percent realization of the admitted amount. These 12 companies had outstanding claims of Rs.3.45 lakh crore compared to a liquidation value of Rs.73,220 crore.

In the case of Amtek Auto, the resolution failed and the process has been restarted, said the report.

Is one year suspension of IBC cases good?

As we have seen above, the number of IBC cases have been increasing over the last three years. But, with the COVID-19 increasing the stress on the economy, the IBC cases are likely to escalate further. But it won’t happen for next one year since the government has said no to admission of fresh cases.

This does not mean the stress will go away, it will only get postponed. As part of the economic package, the government had made a few key amendments to the IBC rules. These include increasing the minimum threshold to initiate insolvency proceedings raised to Rs 1 crore, special insolvency resolution framework for MSMEs, suspension of fresh initiation of insolvency proceedings and exclusion of COVID-19 related debts from the definition of default under the code.

The increase in threshold and special framework for MSMEs are helpful but suspending the entire fresh IBC proceedings for a year and excluding COVID-19-related debt from IBC could lead to chaos in the debt resolution process as this writer highlighted in an earlier column (https://www.moneycontrol.com/news/business/covid-debt-clause-in-economic-package-likely-to-worsen-banking-mess-fm-nirmala-sitharaman-5278101.html).

What is a COVID-19-related default?

The rationale of deciding which default is COVID-19-related seems to be based on the date of application to IBC proceedings. If the IBC application has been accepted before the lockdown start date, that will not be a COVID-19-related default. But, the question is how exactly banks can conclude if the default is indeed COVID-19-related or if the application is filed after the lockdown date. There can be other reasons as well.

It is important to remember that a good number of companies (again MSMEs) were in the stressed category (under special mention accounts for delayed payments) in the books of banks even before COVID-19 hit the economy. Some of them may not have progressed to the IBC stage yet. Banks already have about Rs 29 lakh crore loan outstanding to MSMEs as at end March. Most banks have around 9-10 percent bad loans from this segment (a rough estimate).

In fact, one reason why banks stopped lending to MSMEs in the last 12 months period is high stress from this segment. So, that being the case, a good chunk of the stressed companies can now make a claim with banks for 'COVID-19 related debt’ tag so that they can avoid insolvency proceedings. This will happen regardless of the cut-off date the government will announce to calculate the quantum of COVID-related loans. A refusal by banks can lead to court disputes.

The very purpose of bringing in IBC was a time-bound resolution of bad assets. Given the blanket ban, banks do not have any option for recovery if these loans go bad. “A binding framework of resolution outside of IBC has found very little success in the Indian market. Suspending IBC in entirety, while it looks like a relief to corporates, could actually lead to the corporates being in a state of flux, as all creditors coming together without the sword of IBC on them, has never really won the popularity vote,” said Veena Sivaramakrishnan, Partner, Shardul Amarchand Mangaldas & Co.