Does India need to give more teeth to its bankruptcy code?

Does India need to give more teeth to its bankruptcy code?

The two-year-old Insolvency and Bankruptcy Code (IBC) had been hailed as a game-changer and the biggest economic reform next only to GST when it was passed by the Parliament in 2016. Then, in March, Tata Steel's successful acquisition of Bhushan Steel - one of India's biggest bankruptcies taken to the National Company Law Tribunal (NCLT) - had fanned the country's optimism that the bankruptcy code was over its rocky start.

But that hope turned out to be premature, after all. A recent report by the Boston Consulting Group reveals just how far behind the IBC lags when compared to other nations. While economies like US, UK, Singapore, Hong Kong, Germany and Japan boast a recovery rate in excess of 80 per cent and a resolution time frame of under one-and-half years, India has posted a sub-par recovery rate of 26.4 per cent and an average resolution time of 4.3 years.

Now for the inevitable comparison with China: Like Russia it sees a recovery rate of around 40 per cent and cases are resolved in under three years.

Here are some more dismal figures thrown up by the report:

As on November 2017, over 4,300 applications had been filed in the various benches of NCLT under the Corporate Insolvency Resolution process (CIRP)

Of these only 470 cases have been admitted by NCLT till June 2018, and 500 applications have been thrown out/withdrawn.

A miniscule 11 per cent of the admitted cases have seen closure so far - just 50 cases.

But even the "successful" closures leave much to be desired. According to BCG, only six cases were closed on approval of a successful resolution plan but in as many as 19 cases a liquidation order was issued.  Worse, 25 cases - or 5 per cent of the successful closures - have been set aside by the orders of appellate authorities, like the National Company Law Appellate Tribunal (NCLAT) and the Supreme Court.

A prime example here is the Bhushan Steel case, where the NCLAT is now raising questions about Tata Steel's eligibility to bid for it. This, incidentally, was the only account among the RBI's list of first 12 companies referred for insolvency, which collectively accounted for around 25 per cent of the gross NPAs of the banking system.

All these 12 accounts have exceeded the 270-day deadline for the resolution process set by the IBC, including the grace period of 90 days, post which the liquidation process is supposed to kick off. But all the big-ticket cases in the NCLT so far have been embroiled in pleas and counter pleas with no heed paid to any deadline.

The NCLAT, too, is guilty of moving slowly. The case of Electrosteel Steels, which was admitted by NCLT last June, has been stuck in NCLAT since April.

These stretched-out court battles have cost banks a whopping Rs 25,000 crore, and counting, in terms of interest lost since the levy on NPAs reportedly comes to a halt once the NCLT accepts a case. Before the companies were referred for insolvency, lenders were getting a huge chunk of their revenue as settlement for loan outstanding.

The BCG report further reveals the fate of the RBI's second list of 28 accounts, with a combined exposure of Rs 1.5 lakh crore to the banking system. Only 11 of these companies have been admitted by the NCLT so far, flouting the December 2017 deadline set by the RBI.

"One account has already crossed 300 days since admission without any resolution. Another 4 accounts have crossed 150 days since admission. The remaining accounts have only been admitted in the last 3 months," said the report, adding, "The NCLTs going on vacation during the months of April-June for summer has also further delayed the outcomes in many cases."

The recovery rate under the IBC has also drawn eyebrows. In the case of Bhushan Steel, lenders reportedly had to write-off 37 per cent of the total loan amount. Though the RBI asked banks to make 50 per cent provisions on all NCLT accounts, the country's largest bank SBI has made higher provisions for the list-2 accounts. According to BCG, this indicates that while the "expected haircuts in the list-1 accounts could be around 55 per cent, the haircut on list-2 accounts could be as high as around 75 per cent".

Given the above, is it time to introduce yet another amendment to the IBC, this time focussing on giving it more teeth? Working out a solution to strictly enforce the 270-day deadline for resolution would be a start.