The Insolvency and Bankruptcy Board of India (IBBI) admitted the petition of Bank of India to initiate insolvency proceedings against Future Retail Ltd on July 20, 2022, after the company defaulted on payments to lenders. The proposal is yet to be resolved.
Jet Airways was referred to the National Company Law Tribunal for bankruptcy proceedings in 2019, and the consortium of Dubai-based businessman Murari Lal Jalan and the UK’s Kalrock Capital won the bid for the airline in 2020. The deal has been mired in a legal tussle between the consortium and the committee of creditors on issues related to funds infusion, and the airline is still grounded.
What necessitated the Insolvency and Bankruptcy Code (IBC), brought in by the Narendra Modi government in 2016, was the inordinate delay in resolving such cases. Under the IBC, the settlement had to be completed within 180 days, with the option of 90 days extension. The timeline was later extended to 330 days. The Future Retail and the Jet Airways cases well past that timeline.
And these are not the only cases that were delayed. The Bhushan Steel case took more than 500 days to resolve. Telecom company Aircel shut shop in March 2018 and filed for bankruptcy. The resolution plan was approved by the NCLT in June 2020, some 800 days later.
And it is not getting any better. According to the IBBI, as on June 30, the average time taken for closure of a corporate insolvency resolution process (CIRP) was 643 days for financial creditors, 635 days for operational creditors and 541 days for corporate debtors. This is significantly more than the average time taken for closure of CIRP a year ago (552 days for financial creditors, 555 days for operational creditors and 518 days for corporate debtors).
And the realisations are abysmally low. For instance, the highest bid for Future Retail was just about Rs550 crore, when the lenders’ claims were for more than Rs19,000 crore. If the lenders are to accept this bid, they will have to take a haircut of 97 per cent. Naturally, differences have emerged among the lenders whether to accept the bid or not. According to the IBBI, financial creditors could realise only 34 per cent of their total claims as of June 30, 2023. The realisations for operational creditors and corporate debtors were far lower at 17.7 per cent and 18.3 per cent, respectively.
“Judicial delay is one of the most significant reasons for the delays in resolution,” said Soumitra Majumdar, partner at the law firm J. Sagar Associates. “Multiplicity of litigations and the time taken by the courts in resolving them have pushed up the resolution timelines.”
These cases often have many legal complexities, and there could be many rounds of litigation and bureaucratic delays. “The judicial system, overburdened with cases, can contribute to these delays, especially when the matters involve intricate financial and legal issues that require comprehensive review,” said Sonam Chandwani, managing partner at KS Legal and Associates. “Moreover, stakeholder conflicts and challenges in obtaining clearances and approvals have also exacerbated the timeline.”
In fact, the delays are often responsible for the lower resolutions. “With chronic delays in resolution, often a large part of the value is lost, resulting in reduced real recoveries by the creditors,” said Majumdar. Many cases have ended in liquidation. In such cases, stakeholders barely realise 6 to 9 per cent of their claims.
Of the 6,815 cases that had been admitted for CIRP till June 30, says IBBI data, resolution plans were approved in 720 and liquidation orders were passed in 2,120. There were 2,073 ongoing cases, 897 cases were withdrawn, and 1,005 cases were closed on appeal or review, or settled. Analysts say the number of cases going into liquidation is likely to remain high going ahead. “As of the first quarter of FY24, 65 per cent of ongoing cases have passed 270 days since admission, with another 10 per cent crossing 180 days,” said Kotak Institutional Equities analysts M.B. Mahesh and Nischint Chawathe.
Why has the IBC failed to achieve desired results?
Some experts say it is still a work in progress. “Earlier we were dependent on BIFR (Board of Financial Reconstruction). We have now moved to IBC. And like any institutional framework, IBC is also maturing with constant evolution. Data released last year showed they have made 84 amendments to 18 regulations made under the code. Also, the government has amended the code six times in the past six years,” said Sagar Desai, senior analyst at India Ratings and Research. IBBI are working towards things like common IT infrastructure or portal among all the stakeholders where the IBC process could be managed and tracked from start to end. In some cases, differences in valuation reports given by different valuers also complicates matters, said Desai.
Nonetheless, “IBC has been successful in bringing a behavioural change among the borrowers, by enforcing the fear of losing control of the business,” said Desai.
Experts suggest a multi-pronged approach to improve realisations. “Adopting standardised valuation methodologies can ensure a more realistic and fair asset pricing,” said Chandwani. Encouraging out-of-court settlements before resorting to formal IBC procedures can also improve recoveries and reduce the time for resolution.
Strengthening the bankruptcy courts will be instrumental in realising the full potential of the IBC, and bolstering the information utilities will reduce the time spent in establishing default, leading to quicker initiation of the process. “Sticking to the specified timelines and timely resolutions will preserve the asset quality. Naturally, this should lead to improved realisations and reduced costs,” said Majumdar.
Banks have significantly reduced their non-performing assets. But, of late, credit growth has also picked up. Last financial year, scheduled commercial banks’ credit grew around 16 per cent, outpacing deposit growth by 3 per cent. The expectation is that this year, too, the credit growth will be 14 per cent to 15 per cent.
After the global financial crisis in 2008, banks saw strong double digit credit growth between 2009 to 2013. That was followed by a cycle of sharp rise in bad loans, which eventually led to the enactment of the IBC. This time around, however, corporates have largely remained strong. But only time can tell how things pan out in the years to come. The stakeholders are banking on a more evolved IBC to deal with resolutions, should the number of stressed assets go up again.