A good score-card

Increase in insolvency cases could pose challenges

The implementation of the Insolvency and Bankruptcy Code (IBC) has been one of the biggest reforms in recent years and has significantly helped in improving the business environment. Under the resolving insolvency parameter of the World Bank’s Ease of Doing Business rankings, India improved its position by 56 places in the latest assessment. It also helped push up India’s overall rankings by 14 places to 63rd position among 190 countries. According to the World Bank, India’s insolvency resolution framework is now much better than the economies in South Asia with a higher recovery rate in less time.

However, India still needs to cover a fair distance to take the insolvency framework closer to developed world standards. This is reflected in the latest quarterly report of the Insolvency and Bankruptcy Board of India. The data shows that the number of ongoing cases in the December quarter more than doubled, over the same quarter last year. The number of cases going for liquidation also went up significantly. Since the Code came into effect in December 2016, 3,312 cases have been admitted. While a resolution plan has been approved in about 190 instances, 780 cases ended up in liquidation. Although the number of cases ending up in liquidation looks alarming at first glance, it should be seen in the given background. The available data suggests over 70 per cent of these companies were either with the Board for Industrial and Financial Reconstruction or defunct. 

Differently put, these were legacy cases where the value had already eroded to a large extent before coming under the insolvency framework.

Therefore, it is likely that once legacy cases are resolved, the proportion of companies ending up in liquidation will come down. Nonetheless, the number of ongoing cases needs policy attention. For instance, more than 30 per cent of the 1,961 cases under process have gone beyond 270 days. Although the process must be ordinarily completed in 330 days, an early resolution will strengthen the system. Thus, it is important to build capacity in the bankruptcy resolution system, so that cases are swiftly resolved. This would require regular assessment and provision of adequate resources to the National Company Law Tribunal. 

To be fair, the government has worked promptly in the context of the IBC. For instance, when it emerged that the interests of successful bidders could be affected because of the wrongdoing of the previous management, it quickly amended the law to protect the new owners. Similarly, it strengthened the law by establishing the prominence of secured creditors after an adverse judgment. 

Improving the capacity of the insolvency resolution system will help the Indian economy in multiple ways. It will aid creditors in minimising the damage. Consequently, it will help reduce the stock of non-performing assets and increase the flow of credit. In large cases, the recovery has been far more than the liquidation value. In the case of Essar Steel India, for instance, the recovery has been over 260 per cent of the liquidation value. Further, a swift resolution will improve the credit culture in the economy. It’s no longer possible for promoters to hold on to their companies in the case of continued default. At a broader level, this will make the allocation of credit more efficient and help push up the growth potential.