Nearly four years back when the Insolvency and Bankruptcy Code (IBC) came into effect, the perception was that the corporate defaults would come down drastically as the law enforces separation of the promoters from their bankrupt businesses. According to the latest data of Insolvency and Bankruptcy Board of India (IBBI), the number of new cases admitted to insolvency courts has increased by 30.29 per cent to 3,312 in the three months until December 2019. In the calendar year 2019, the number of cases soared by 123 per cent.
Of the 3,312 companies admitted for insolvency resolution, the process is going on in 1,961 cases. The resolution process ended in 40.8 per cent of companies. In 17.2 per cent of companies, the resolution plan has been approved or went for review or the company has withdrawn the insolvency petition under Section 12 A. The liquidation process has started in 23.6 per cent (780 companies) of bankrupt companies.
Manufacturing is one major category under which a large number of loan defaulted companies are parked. Of the 1343 manufacturing companies, which admitted for insolvency resolution, 340 have been referred for liquidation after finding no qualified buyer. In 95 cases, the resolution plan has been approved; 77 sent for review or appeal, and 52 companies withdrawn from insolvency resolution process under Section 12 A of IBC. The process is on in 779 companies.
It is interesting to note that the defaults in manufacturing companies have soared when the government is offering more policy supports to the sector, besides enhancing the public investments. Led by a 1 per cent contraction in manufacturing, India's GDP growth has decelerated to a six-and-a-half-year-low of 4.5 per cent in the September quarter. Manufacturing is important because it is the only way through which low-income nations can prosper to higher levels. The broader manufacturing category in the IBBI report includes metals, textiles, food and beverages and machinery and equipment.
The IBBI data shows that the companies in real estate and renting business have been affected the most because of the slowdown in the economy, besides the ones in construction. There are only a few non-affected sectors, which include information technology (IT) and the allied services, while IBC does not cover the bankruptcy in banking, financial services and insurance (BFSI) sectors. Though gross financial mismanagement is considered one of the reasons for ending up in bankruptcy, the sectoral turbulences have also played a part in many cases.
In mid-2016, Reserve Bank of India (RBI) had first asked the banks to take the 12 big loan defaulters to National Company Law Tribunal (NCLT) and try under IBC. The lenders had an outstanding claim of Rs 3.45 lakh crore in these companies. So far, the resolution process has been completed in seven companies, including the recent one- Bhushan Power & Steel sold to JSW Steel. The lenders have realized Rs 1.13 lakh crore from the sale of the seven companies.