The government has been reposing a lot of hope in the Insolvency and Bankruptcy Code (IBC) to address the issue of non performing assets of the banks. The Economic Survey report released yesterday called the IBC resolution process "a valuable technology for tackling this long-standing problem in the Indian corporate sector". The IBC has been helping the government and the banks in resolving the NPA crisis. Of the total 442 cases in progress till December 31, 2017, 117 have crossed the first milestone of 180 days. Resolution plans in as many as 10 cases have been approved, 30 went for liquidation and 36 closed by appeal and review.
But have creditors been able to recover the kind of money they would have liked to? A study of the data provided in the Economic Survey Report, says that of the Rs 5,530 crore claims made by financial creditors in 9 out of the 10 cases, they could recover only Rs 1,853 crore or 33% of the total claims. (In the case of Nandan Hotels, filed by an operational creditor, the data of the financial creditors' claim is not available).
In three of these cases, the amount recovered is less than 30% of the total claims. In case of Synergies Dooray, the first case to be resolved through IBC, the recovery was as low as 5.6%.
Though these are early days, and most of these cases are small cases with the largest being Kamineni Steel & Power India where the financial creditors claim was just over Rs 1,500 crore, a 33% recovery rate is not what the government should be elated with given the recovery rate was around 26% even before the IBC. Of course, average time would come down from 4.3 years to less than a year probably because of strict timeline (a maximum of 270 days for resolution) prescribed under the law.
However, experts believe that even 33% recovery rate is an improvement and therefore, it augurs well for the creditors. "In the first few cases, the chances of recovery were anyway very low, so any recovery due to the IBC is good," says Shiju PV, partner in law firm India Law. He says the recovery rate would improve when the individual bankruptcy laws are notified. "Many promoters have given personal guarantee to banks, and once individual bankruptcy laws are notified, individual bankruptcy proceedings can be initiated against the promoters, putting additional pressure on them for resolution," explained Shiju. He also pointed out that a large part of the claims made by financial creditors would be accrued interest. "So if the creditors could even recover most of the principal amount through resolution, that would be good enough," he added.
In case of Synergies Dooray, while the total claims by financial creditor was Rs 972 crore, the principal amount due was Rs 215 crore. In the final resolution, the creditors could recover only Rs 54 crore. However, resolutions in the 12 big cases that have been referred to the National Company Law Tribunal by banks at the behest of the Reserve bank of India are yet to start. Many of these cases have got an extension after completing the first 180-day deadline, and some others have applied for extension.
These 12 cases are a kind of litmus test for the IBC and the way they are resolved would reveal the effectiveness of the insolvency law.
The Economic Survey report says that the procedure is still a work in progress and makes the observation that ensuring timetables are respected and the bidding outcomes are accepted by all parties in the early cases is critical for establishing its credibility.