IBC is finding more takers, but the process is getting painfully slower

There is a higher degree of asset resolution in cases where the claims are smaller, while high-profile cases are ending up with bigger haircuts

The biggest success story under the Insolvency and Bankruptcy Code (IBC) so far, the resolution of a dying Bhushan Steel and the process of takeover by Tata Steel for Rs 35,571 crore, would complete one year in a few days.

In the 94 resolved cases since the inception of IBC, lenders have taken haircuts of as much as 55 per cent on average. Apart from this obvious area of concern, however, the IBC is stabilising and finding more acceptance. But at the same time, it is becoming more burdened, giving way to more and more litigation, and has possibly been treating smaller companies differently than big-ticket cases.

Real estate and construction companies are still leading the pack in terms of the number of cases being filed under the IBC law. This is significant since on the one hand, the real estate sector has been reeling under multiple pressure points for some time; construction remains one of the only consistently growing areas in the economy.

Experts believe that the pressure on the insolvency administration is slowly rising and the IBC courts are likely to get burdened with more work on their plate in the coming quarters. The pressure will become more evident and tangible once liquidation as a way of closing a case loses the top spot, and successful resolution takes centrestage.

“The progress of the Corporate Insolvency Resolution Process (CIRP) under the IBC has been hampered over the past two years by the over-burdened NCLTs, innumerable litigations, defiant promoters and failing sectors,” Abhishek Dafria, VP corporate ratings at Icra said in a note.

The Supreme Court's striking down of the February 12, 2018 circular from the Reserve Bank of India “is a blow to the IBC”, the Icra note said. However, as the SC judgement came on April 2, 2019 and the data analysed pertains to the period up to March 2019, the impact of the apex court's ruling on IBC is yet to appear on the surface.

Greater acceptability, slower progress

The IBBI data shows that between January and March this year, as many as 359 new cases have entered IBC, the highest ever in any quarter, even as the running cases drag on. The ongoing CIRPs doubled from 544 at the end of March 2018 to 1143 as of March 2019. But there’s more to it than just the numeric rise in cases.

In the first quarter of 2018-19 (April–June 2018), about 26 per cent of the cases were in the process for more than 270 days. In the last quarter of the same year (January–March 2019), some 32 per cent of the cases fell in that group.

Part of the explanation is that litigation has begun to take more time now.

“Prevalence of resorting to litigation has surely increased in recent months. Stakeholders who are not happy with the resolution plan agreed upon by the Committee of Creditors with majority, are moving the courts more often,” says Sandeep Grover, partner at IndusLaw.

But as new cases keep piling up, the IBC administration, the National Company Law Tribunal (NCLT) and the appellate body (NCLAT) need to be prepared for this increasing burden, say experts.

“Since the number of cases admitted in IBC is rising, it is important for the institutional infrastructure to continue to build capacity to deal with increasing volumes,” says Shreya Prakash, a law expert at Vidhi Centre for Legal Policy.

Smaller the company, smaller the snip

Looking at the efficiency of resolution, financial creditors have been able to realise about 43 per cent of the admitted claims. This ratio is not so different from the realisation achieved in the top five cases, which constitute two-thirds of the claims admitted by financial creditors to date. This suggests that on average, realisation does not vary drastically with the size of the company admitted for resolution.

However, a deeper look at the data shows that smaller the company (or admitted claims), the better is the value realised. Of the more than 90 resolutions analysed by Business Standard, financial creditors in 19 companies realised more than, or equal to, 100 per cent of the claims they had demanded. In these, the average value of claims was Rs 440 crore.

For insolvency processes that have yielded realisation between 70 and 100 per cent, the average value of admitted claims is nearly Rs 550 crore. And for claims valued above Rs 5,000 crore, realisation has been between 25-75 per cent, and has not in any case crossed 75 per cent, the data analysis shows.

Analysts however believe that realisation will improve in 2019-20. In its note, Icra said that financial creditors (FCs) would realise more than Rs 80,000 crore in FY20 through resolution. Data shows that FCs have realised nearly Rs 75,000 crore in more than two years of working of IBC.

Realty and construction firms still on top

Most of the new cases this quarter have come from the real estate and construction sector, in continuation of the previous trend. While there were 95 cases from the manufacturing sector this quarter, “real estate, renting and business activities” accounted for 83 new cases, while construction added another 37 to the pipeline.

Of the 359 real estate cases that have entered the IBC so far, 128 have been closed, while 231 are still on. With stretched finances and liquidity, realtors are knocking the IBC door with rigour, experts said.

“RERA ensured that funds cannot be diverted from one project to another. Secondly, the NBFC crisis has aggravated the liquidity crunch. Finally, homebuyers are now moving the NCLT after the IBC Ordinance made them equivalent to financial creditors,” said Anuj Puri, chairman at ANAROCK property consultants.

Liquidation likely to recede

One area of concern has been that liquidation is turning out to be the preferred route for closing cases. But of the 378 that have ended up in liquidation to date, about 75 per cent are cases carried forward from the erstwhile Board for Industrial and Financial Reconstruction (BIFR). As the backlog gets exhausted, instances of liquidation are likely to reduce, experts believe.

However, even liquidation is becoming more and more time consuming, IBBI data shows. The share of cases under liquidation taking 360 days or more rose from seven per cent in April–June 2018 to 28 per cent in October–December 2018. But this number has some down to 20 per cent in the January–March quarter of FY19.  

Operational creditors buck the trend

An interesting pattern has been observed in how operational creditors have been able to realise their claims. While the contention that larger claims are getting resolved with a smaller realisation is true for financial creditors, it is exactly the opposite for operational creditors.

The average value of claims submitted by operational creditors in cases, which ended up in a realisation of more than 75 per cent, was Rs 126 crore, while it was Rs 78 crore in cases where realisation was less than 75 per cent. High-value claims of operational creditors have generally resulted in better realisation.

Icra expects the increase in admission of new cases to be led by operational creditors.Though this trend is true at the summary level, case-to-case differences are huge. While Bhushan Steel's (claim value Rs 56,022 crore) acquisition by Tatas yielded 63.5 per cent to the financial creditors (realised amount Rs 35,571 crore), the resolution of Alok Industries (claim value Rs 29,523 crore) yielded only 17.1 per cent (realised amount Rs 5,052 crore).