IBC delivering results; a reform Modi, Jaitley should be proud of

India rose 23 notches in the Ease of Doing Business rankings to 77 from 100 this year. However, its ranking in resolving insolvency cases, one of the 10 parameters on which these rankings are based has fallen from 103 to 108.

It is surprising that one of the most successfully implemented reforms by the Narendra Modi government -- the Insolvency and Bankruptcy Code (IBC) -- has gone unnoticed by the World Bank, which comes out with these rankings every year.

The rankings, which are based on surveys by corporate executives and entrepreneurs in Delhi and Mumbai, continue to show the rate of recovery (of debt from defaulting businesses) at 26.5 per cent, time of recovery 4.3 years and the cost of recovery 9 per cent of the assets of the debtor. These parameters remain unchanged from 2016, when the new insolvency laws were brought into force.

Gyaneshwar Kumar Singh, Joint Secretary, Ministry of Corporate Affairs, the nodal ministry which oversees the regulatory framework of the new law, appealed to CEOs and promoters in a recent event on IBC, organised by Confederation of Indian Industry (CII) to participate in larger numbers in the survey.

Singh was perhaps right. IBC, despite all its shortcomings, has changed the loan recovery landscape in the country.

Just two years since its launch, IBC has resulted in resolution of 88 corporate loan default cases involving Rs 2.09 lakh crore non-performing assets (NPAs) and facilitated recovery of Rs 1.12 lakh crore as of 25 March 2019. This is a recovery rate of 54 per cent.

Of course, not all cases have been resolved within the stipulated time of 270 days. Some dragged on for much longer such as the Essar Steel Case, which lingered on for over 500 days; yet it is a sharp improvement from the average time of 4.3 years it used to take before the advent of IBC regime. Even the cost of resolution has come down to less than 1 per cent against 9 per cent earlier.

Of the 12 large cases -- including those of Essar Steel, Bhushan Steel and Alok Industries -- which accounted for unrecovered loans of Rs 3.45 lakh crore, six have been resolved. And have led to a loan recovery of Rs 96,000 crore, logging a healthy recovery rate of 56 per cent. These are the cases, which have been resolved.

There were around 4,000 cases involving Rs 2 lakh crore of outstanding loans, which were resolved even before the insolvency proceedings could start.

To the Modi government's credit, it was quick to act on the need to have a new insolvency law. Within three months of coming to power in 2014, the government had formed a committee to draft a new bankruptcy law. The committee submitted its report in November 2015 and the bankruptcy bill was tabled in the Parliament in December that year. By May 2016, the bill was given the President's assent and by December 2016, the new law was in force.

The speed with which the government acted and brought the law was unprecedented and commendable.

Clive Barnard, Partner, Herbert Smith Freehills, a London-based law firm, says, from a foreigner's perspective, it is extremely remarkable how much has been achieved in such a short span of time. "We honestly thought what was being proposed is too ambitious when we looked at the initial proposals; we were really frightened to know what you were going from to what you were going to, and how dramatic and quick that transformation was," admits Barnard.

Herbert Smith Freehills has been engaged with the Bankruptcy Law Reform Committee (BLRC) since February 2015, after it was invited to assist the BLRC and give its input on the draft Code.

Improved credit behaviour

IBC has been a paradigm shift from the earlier loan recovery legislatures like the Sick Industrial Companies Act (SICA Act) and Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act). While in the earlier laws, borrowers were in control, in IBC it is the creditors who are in control over the recovery process.

This has brought about a complete change in attitude towards the resolution. Earlier, the promoters of the defaulting company would drag on the process denuding the company of its value and net worth, leaving little for the creditor to recover.

Under IBC, as the creditors are now in control, they want early resolution and maximum recovery.

The law is such that once insolvency proceedings begin under the IBC, against the loan defaulters, promoters of these companies lose control of the company. This instils fear among 'wilful' defaulters and establishes more responsible credit behaviour among borrowers.

"Through the behavioural changes, the borrowing and lending culture will get positively impacted and the NPA problem would be addressed to a considerable extent at the company and bank level," says Secretary, Ministry of Corporate Affairs (MCA), Injeti Srinivas.

Unlike the older laws, IBC allows just anyone -- vendors, employees, or government authorities (for any statutory dues like the unpaid tax, electricity bills, etc) -- to initiate proceedings against the defaulting companies.

Of the 1,484 cases admitted so far, 742 or 50 per cent have been initiated by operational creditors, which include vendors, employees, etc.

RBI has also played a significant role in ensuring that large cases of corporate loan defaults are resolved through the IBC. It initially pushed the 12 large cases, which alone accounted for Rs 3.45 lakh crore of NPAs in the system. It then through its controversial February 12 (2018) circular, asked banks to classify a loan account as stressed if there was even a day of delay in the payment and made it mandatory for the lenders, to refer cases with over Rs 2,000 crore loans to IBC, if they failed to resolve the problem within 180 days of default.

Continuous Evolution

According to Clive Barnard of Herbert Smith Freehills, the insolvency laws in the United Kingdom underwent drastic changes in the 1980s, then there was another round of changes in 2000s, and there are yet ongoing talks about changes in the current law. He says, "The law in the UK is still not perfect and it is still evolving."

Branard probably hints that the (insolvency) law needs to continuously evolve here in India too. But he appreciates the government and stakeholders, here in India, for the way they have followed through with the required changes in the law even after it came into existence two years ago.

Of course, there are still gaps in the law and infrastructure is overstretched. Since these are early days for the law, there are concerns that unscrupulous promoters might try to sabotage the whole process in some cases, and therefore regulators and all other stakeholders must maintain vigil against any such attempts.

Bahram Vakil, Founder and Senior Partner, AZB & Partners, a law firm, says that though value maximisation is the purpose of the law, it should not happen at the cost of the process. He cites misuse of Section 12A of the law, which allows withdrawal of insolvency proceeding against a corporate defaulter.

Then there are issues such as a large number of cases going for liquidation, the unfair treatment meted out to operational creditors and capability of resolution applicants.

On the issue of a large number of cases going for liquidation, MCA Secretary Injeti Srinivas, says, "Majority of the cases that have been liquidated were BIFR (Board for Industrial and Financial Reconstruction) cases -- may be more than 70 per cent. They were long pending cases and there was no possibility of resolution because the asset value had been more or less destroyed. If you look at the liquidation value of such cases, it is hardly 5-7 per cent of the claims."

Rajesh Begur, the managing partner at ARA LAW, says that while these issues will be resolved in a year or two, lack of infrastructure or overstretched NCLT benches paint a sorry picture.

Currently, there are 12 benches of the National Company Law Tribunal (NCLT) and 25 members (16 judicial and 9 technical members). Gyaneshwar Kumar Singh, Joint Secretary, Ministry of Corporate Affairs, said that 36 new members will be inducted and two new benches of NCLT will be set up in Indore and Amravati in a couple of months.

Despite all the constraints and inadequacies in the insolvency law, it has proved to be a masterstroke of Modi government that will, indeed, have a far-reaching impact on the country's economy in the long term.

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