Resolution-less bankruptcies on rise in India

In 2016, the Insolvency and Bankruptcy Code (IBC) was enacted with much fanfare amid hopes of reviving the stressed companies. Three years on, the picture looks grimmer.

There are two key takeaways from the data available with the Insolvency and Bankruptcy Board of India (IBBI): Firstly, in 2019, the insolvency proceedings have seen a surge, and secondly, in most cases under the coveted IBC, the companies go under the hammer of liquidation.

In 2019 alone, 1,039 companies were taken by the creditors for the insolvency proceedings. In just nine months, this number is 8% higher than the 959 cases registered last year. According to market watchers, this indicates a few things -- economic indicators are weighing heavy on India Inc, and over-leveraging, largely seen as a legacy problem built-up over the years of financial mismanagement, is ultimately taking a toll on India Inc.

At the end of the September quarter, the total outstanding amount of India Inc in the debt market stood at a whopping Rs 30.8 lakh crore, while bank debt to industries and services sector stood at Rs 51.4 lakh crore. The combined number is 4.44 times the net sales of India Inc at the end of the June quarter, which according to CARE Ratings stood at Rs 18.5 lakh crore.

According to various analysts, an estimated Rs 42,000 crore worth of exposure spread across nine banks, is facing a very high degree of stress -- with State Bank of India, YES Bank and Bank of Baroda the worst affected. In the wake of this, a fresh wave of bad loans is likely to hit the Indian banks -- which is likely to cost about Rs 1.2 lakh crore, mostly from the companies in real estate and shadow banking.

The economic slowdown isn't helping the situation either. Falling growth would mean lesser earnings for Indian corporates. That increases the burden and the cost of servicing the debt in India manifolds. Quite naturally, many of these companies, where stress is visible (25 in total), are likely to default anytime in the near future. And many of them are big companies, which can cause a ripple effect leading to the collapse of other companies.

Lack of resolution plans

Another key observation in the IBC data is the lack of resolution plans. Of the 2,542 cases of the corporate insolvency resolution process (CIRP) registered with the National Companies Law Tribunal (NCLT), 59% (or 1,497 cases are still pending). Of 1,045 cases that have seen resolution, an astounding 56.2% of the cases (587 cases) have led to the liquidation in the companies. Only in 156 cases, the resolution plan is agreed upon, of which, in five cases, later on, liquidation was initiated.

Many experts believe that this is because of the lack of resolution plans. DH spoke to various people associated with the law. "There are the usual issues with judgments and how things aren’t being settled in a time-bound manner," a person sitting on one of the bankruptcy committees told DH.

The source also added that there have been huge differences between operational creditors, financial creditors, and corporate debtors -- any of whom can initiate CIRP -- over the resolution plans. Till now, operational creditors have initiated 1,232 CIRPs, financial creditors have initiated 1,086 CIRPs and corporate debtors have initiated 224 CIRPs.

There have also been cases where either of the creditors hasn't been happy with the insolvency proceedings. Like in case of Essar Steel's Rs 42,000 crore sale to ArcelorMittal. In this case, the banks were forced to go for a larger haircut than originally planned, as the NCLAT said secured creditors will get only 60.7% of their Rs 49,473-crore claims while the rest will go to operational creditors, who will be treated on par with financial creditors.