By Manohar Manoj
There was always a need for a viable anti-corruption & fraud regime for the country’s corporate world and in this regard creation of ‘The Insolvency and Bankruptcy Code'( IBC) and the establishment of the Insolvency and Bankruptcy Board of India (IBBI) in 2016 could be definitely labeled as the landmark initiatives. Now IBBI definitely can be called an agency that is ready to ensure creditors’ creditworthiness as well as their confidence in the country. These things become more significant seeing our historical contexts when we saw the decade of 1990s full of frauds committed by our NBFCs, who used to establish themselves simply by a company registration without even the nodding of our then banking regulator. The mushrooming presence of these institutions just went for posing greed of a super rate of interest to the depositors and thus grabbed an enormous amount of money from them. Later a time came when most of them went underground. Many NBFCs depositors committed suicide because they were not able to make treatment of ailing persons in their family, giving education to their children and marriages of daughters all suffered and shattered for them.
We saw the decade of the 2000s when thousands of real estate companies got erupted seeing the trend of the housing revolution in the country. Many companies came up with several pre-launched housing schemes and construction plans for consumers/ investors. Since these companies have had a malafide intention, they deceitfully took away a hefty amount of money from the millions of masses.
What we found most of the pre-launched schemes either did not take off or were hugely delayed and in many cases, it was found companies made their shutters down. In the same manner, during the decade of 2010s, we witnessed three kinds of development; the first rapid rise of Ponzi companies in the country, the second breaking of many bank scams followed by an enormous amount of bank loans getting turned into NPAs where it was found a large sum of the loan were taken without sufficient security either under some sort of political pressure or by the connivance of corrupt bank officials. It resulted in a massive hike of the NPAs of the banks which went up from 6 percent to 11 percent of their total assets.
In these circumstances of the country, where one could easily see the gamut of corruption getting so larger in all respects which was also accompanying financial frauds at enormous scale in corporate India. At this juncture, the establishment of the Insolvency and bankruptcy code passed by the Parliament of India in May 2016 and the institution of the Insolvency and Bankruptcy Board of India IBBI, as its regulatory authority were masterstroke development.
It is to be mentioned here, this is the era of regulatory authorities. As we know how the establishment of TRAI in our country enabled back-to-back telecom, mobile, communication, and the digital revolution in the country. It brought both private and public players hand in hand and facilitated both market and bureaucracy to work in tandem. In the same manner in corruption-ridden countries like India, there was a need for such laws, institutions, and an adjudicating authority that can create a new environment of probity and culture of creditworthiness in all sorts of financing and lending pertaining to all sorts of secured and unsecured money markets. Though insolvency technically is not a synonym for corruption, the motive behind insolvency very much shows the cheating and corruption tendency of company owners and promoters.
It is to be mentioned here before IBBI, we have had the SARFAESI Act in the operation, under which Debt recovery terminals DRT were established as their adjudicating authority. Same way NCLT has been established as the adjudicating authority for IBBI. Under SARFAESI act only secured institutions like banks and other financial institutions were being covered, which can go for sale of defaulting borrowers’ individual and commercial assets with the judicial help of DRT, whereas the establishment of IBBI, ensured coverage of all sorts of financial transactions and funds collection committed by all sorts of corporate firms/ individual, whether established in the name of real estate projects or in any sort of deposit schemes and all kinds of bank loans. The institution of IBBI came up with four mega words, ‘bankruptcy’, ‘insolvency’, ‘liquidation’, and ‘dissolution’. Apart from this, IBBI does its utmost effort to rescue the bankrupt/sick/ defaulter individual/ companies/ firm/ partnership firm/ limited firm, etc. Therefore it starts work first for the resolve and resolution under the aegis of appointed ‘Insolvency and Resolution professional’ IRP.
It is to be worth mentioning here, before 2016, in India there was no such law dealing with insolvency, nor it had any regulator to meet the complaints of creditors. We had only one law for individual bankruptcy initiated in 1874 and enacted in 1920 and in the case of winding up of any company, it was being decided through courts, which could take even a decade time.
Since the establishment of IBBI and NCLT, as its quasi-judicial adjudicating body in October 2016, the foremost welcome development that took place was the inclusion of all sorts of financial transactions and investments collected by the individuals/ corporate by amending the IBC. Under this, all defaulter realtors were included whose projects have had a long pendency history. It is notable here in July 2017, RERA, the Real estate regulatory authority was established which actually paved the move for the inclusion of all defaulter real estate companies under the checklist of IBBI. Apart from this, all the foreign companies working in India and India’s companies working overseas were also brought under the domain of IBBI if they have insolvency conditions. It gave a huge relief to the millions of investors in the country, who were wandering hither and thither in order to recover their trapped investments and deposits.
When we look back at the past 3.5-year experience of IBC, we find many things, which have both sweet and sour results, various ups and downs, and many matters left to be reviewed also. First of all, we are witnessing a concrete initiative and a holistic platform to treat all outstanding cases and multiple ways out plans for both debtors and creditors of the country. But when we go through the status of all registered cases pertaining to IBBI, we find various shortcomings attached to the new regime also. The first problem lies with the judicial infrastructure of NCLT, This is the adjudicating body of IBBI, which takes the matter when resolution does not take place and the second debtor has to be asked for the payment of the liability either from their own source or through the liquidation of his project site/ assets/ other belonging, etc. NCLT was formally established on 1st June 2016 whose jurisdiction was to cover all the areas coming under the Company Act, 2013 proceedings including arbitration, compromise, arrangement, reconstruction, and winding up of companies.
NCLT is key to all proceedings of insolvency and bankruptcy. Since all settlements of disputes have to be cleared by the judgmental procedure so it is NCLT, which always has to prevail. But the irony has been that as of now NCLT has only 16 benches in the country spreading all major cities of the country, whereas the requirement estimate was that of 60 benches, Second to run all these 16 NCLT benches there requires at least 60 judges; but since a long time, only 21 judges were available. Therefore the speed of litigation clearance was found to be very slow. This was the reason out of a total of 2 lakh crore of stressed assets of RBI trapped with 12 cases, only 5 cases were disposed of. It was in June 2019 when the Ministry of Corporate Affairs appointed 30 new judges for Delhi, Mumbai, Hyderabad, Jaipur, Allahabad, Cuttack, and Kochi benches. We have to accept the fact that judicial infrastructure is a prerequisite factor for clearing all sorts of financial outstanding, bank NPAs, and all forms of stressed assets lying in the country.
Since the arrival of IBBI and the operationalization of IBC, things have been definitely good but that cannot be taken for granted. The picture has not been very rosy. Many disputes are still on even after consuming more than a period of one year. Some statistics give us hope, but still, we are lagging in terms of realization. Very astonishingly, when these institutions came, a sense of optimism was so high in the county that even before admission into the proceedings of the IBC process, more than 2.02 lakh crore of debt amount related to around 4452 cases, got cleared.
Since the operation of IBC, many notable outstanding issues have been cleared. Out of this, Essar Steel got liquidated to the Vedanta group involving itself with more than Rs.50,000 crores worth of loan. In the same way, Bhushan Steel trapped with a debt of around 25000 crores was ultimately acquired by Tata Steel under its liquidation process.
As of now, IBBI has more than 2000 cases under its proceedings, out of which 600 cases have cleared to its end. In the remaining cases, around 1000 cases are waiting for the final reports of Insolvency professionals( IP). Now, overall bank NPAs have also gone down from 11 percent to 9.2 percent in March 2019.
Frankly speaking seeing the mammoth size of financial bungling, bank scams, long-delayed insolvency, and a large volume of NPAs, a huge amount of trapped money paid by housing investors/ consumers and Ponzi scheme depositors, the ratio of settlement/resolution/ liquidation being made by IBBI is too small, but since a good beginning has been made, so final good results are certainly being awaited. When we see the figure of achievements made by IBBI in terms of timeline, in terms of realization ratio, in terms of liquidation, in terms of pendency of cases in NCLT Courts, achievements have been found dissimilar and uneven.
Though it has become a clear belief now that before IBBI, it used to take an average of 4.5 years’ time for any debt settlement, which has reduced to an average of 1.5 years now, and the second ratio of recovery of funds has gone up from 26 percent earlier to 48 percent now. Apart from this, the cost incurred over the recovery assets also used to be 9 percent of the total investment earlier, which has gone down to just 0.5 % of the total outstanding amount now. The other notable factor is the yield value of the liquidation, which has even gone up to 200 percent of the earlier value. Secondly, the arena of defaulters has certainly widened under IBC than SARFAEISI Act, and adjudication has gotten more speed under NCLT in comparison to DRT. The recent figure of the recovery made by IBBI in the financial year 2019 is 70000 crore, which is just double DRT’s recovery amount of 35000 in fiscal 2018. In 2019, IBC resolved around 94 cases and registered a 43 percent of recovery rate, whereas non-IBC measures have a recovery rate of just around 26 percent.
The most worrying point associated with the functioning of IBC is the slowing down of recovery proceeds during recent months. The last quarter of the year 2019 has a very low recovery rate of 12 percent. Even after the fixation of the maximum stipulated period of 330 days for the resolution, it is not clear how long the cases will go. Now the average time taken for resolution and liquidation is rising rapidly
Data shows the company in operation has more possibility of resolution, whereas, in the case of defunct companies, it was found one-third of them have had no possibility of resolution. In the wake of the COVID-19 lockdown period, IP and other stakeholders have already been given an extra 6 months period to complete their reports and respective works. NCLT has also extended its hearing process for a further 3 months period. Under these circumstances, the major insolvency cases associated with Jet Airways, Reliance Communications, and Videocon have gone into pending mode now. During the last 2 years, statistics given by CRISIL India tell that the recoveries made by IBBI are on a downward note.
| 2018 2019 | |||||
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Another fact that deserved to be noted is the timeline of resolution. Firstly the timeline of the resolution was fixed, which was 180 days, later increased to 270 days and then 330 days. But the statistics show most of the cases are cleared neither under a lower timeline nor under a bigger timeline.
| Days Recovery Percentage |
| 0-200 20.4 |
| 200-270 43.6 |
| 270-330 56.6 |
| 330-400 24.2 |
| 400-520 45 |
| 500+ 41.1 |
Source—CRISIL INDIA
The average time period is 364 days
If we see the recoveries made on the basis of industries, we find metal, chemical, leather, and textile industries made good progress in respect of clearing their outstanding as well as the transfer of owners in the process of liquidation of around 480 companies. Apart from these segment companies, the recovery made by IBC in other areas is just 20.25 percent. The most worrying aspect is associated with real estate companies, who have more gone for appeals/ reviews. It would be imperative to say that IBC is just the beginning, many strides have yet to achieve, and not to mention problems, hindrances, and barricades are innumerable before this. In order to do this, it is very necessary to make time-to-time amendments and apply flexibility in regard to several sections and clauses of IBC also. Of course, from time to time many amendments have been done by Govt. of India also, which has so far amended this law thrice. Also, IBBI, the regulatory authority of this code has also amended regulation as per the fundamental structure of law. A total of three amendments were made by Govt. of India adding home buyers under the definition clause. Since then, home buyers also fall under the definition of financial creditors and are able to recover the amount paid as an advance.
The latest amendment was made in March 2020, under which new owners of the liquidated firms have been given big relief and incentives both. First, the new owner will have a legal armory not to be trapped in any new litigation against the misdeeds of the old owner. Second RBI allows themselves to take external commercial borrowing ECB for clearing their old dues. Competition Commission of India CCI provides them a separate route for their expeditious plan and the revenue dept has decided to give them depreciation loss forwarded against their book profit.
Before this, an important amendment was done under section 16 of IBC, under which it has been allowed even 10 percent of creditors, minimum numbering 100 to file a petition for the resolution of insolvent firms/individuals.
Another significant amendment was done under which section 12 A allows a creditor to withdraw the case of insolvency filed before NCLT in case 90 percent of creditors vote in favor of this decision. Because of this provision around 135 cases have already been withdrawn
Suggestion
Introducing the concept of clearing insolvency and bankruptcy in India is a new initiative, which has been made not only holistic rather it has provided a wider arena. Therefore, these things have to always keep on changing and modifying notes depending upon the requirement of the situation and experience. It is heartening to know IBBI has started a new drive to take suggestions from common persons in relation to all the stakeholders of IBBI. Among them, the corporate debtor, the creditor to the corporate debtor, the IP Agency, the IP Entity, the personal guarantor of the corporate debtor, the proprietorship/ partnership firm, the academician, and investors all have been included. This suggestion-taking process will continue till the end of this current year 2020.
Govt. of India always tries to simplify the law and its all proceedings. Out of all these, the major hurdle was the inadequacy of judicial infrastructure, which has been addressed now by appointing 30 new judges. When we allow NCLT Court and its all benches to work at full strength with all judicial and technical manpower, then both resolution and liquidation will get more approvals and then the realization would take place at a faster note. Not to say the country still has more than 9 percent of NPAs and around ten lakh crores of rupees are being trapped in various realty schemes and Ponzi deposit schemes.
Talking about further reforms and new measures in this mission, it is very necessary to track all the disputes and their mandatory reportage under a resolution plan. Second, regarding the rising timeline, it is to be noted here until and unless the case is going toward a settlement, that is not worrying, the only thing is that there should be no halt. If we have a logjam situation underlying several cases, then it requires multiple formulae including forfeiture of all assets, passports, etc, and also initiating criminal charges against debtors through going out of the purview of NCLT.
We have not to forget that in India many of the offenders, defaulters, and insolvent companies/persons are willful defaulters and their main purpose has been cheating and fraud and taking away all the principal and proceeds. This factor has to be specially taken into account. We have already the fugitive offenders act in operation now, we can take this law also in order to catch the insolvency culprit residing abroad. One of the objectives of IBBI which is clearly mentioned is to rescue the sick business and make the firms alive, which is a very welcome thing.
conclusions
Setting the target for more and more tracking of insolvency cases, then its reporting and registration under IBBI and then its resolution by IRP and liquidation by NCLT; in all these things have to run on a fast and mandatory note in order to minimize the NPAs of financial institutions, recovery of investment made by investors/creditors, and reconstruction of debtors assets. In this regard, it is also necessary to regularly render a comparative study of all insolvency and bankruptcy institutions of the world. Notably, insolvency institutions of the US, Canada, UK, France, and Australia have scripted many remarkable success stories, that have to be taken into account.
In India, no doubt many innovative measures are being taken now for clearing NPAs and outstanding firms. Under this banks have been given the freedom to deal settlement with their debtors without filling a resolution plan under IBC. Further, the Ministry of corporate affairs issued a notice seeking public views on group insolvency and pre-packaged insolvency resolution. In a pre-pack, a defaulter arranges to sell all or some of its assets to a buyer – with the blessings of its lenders – before declaring insolvency. It then files this resolution plan with the NCLT for its approval. Such a mechanism will speed up the resolution process since much of the work is done before approaching the tribunal and relieve the pressure on the NCLT infrastructure.
IBBI has also allowed many pre-settlement and pre-arrangement plans which are being offered to debtors so that more and more ice can getting meltdown and deadlock could be cleared as fast as possible in order to rejuvenate the business environment of the country.
Last, but not least SARFAESI ACT and IBC Act should be merged and in the same way, NCLT and DRT must be merged also, so that we may
have a new integrated and vast regime of insolvency mechanism in the country. It will pave the judicial infrastructure, technical manpower and thus ensure more and more reporting of the dispute cases and then their target-oriented realization. Apart from this we also need to establish permanent coordination with all regulatory and adjudicating authorities. In this context, all state RERA must have permanent coordination with IBBI. We also need to start a proper rapport with the banking regulator RBI and stock market regulator SEBI in this regard.q
The writer is the Editor& Publisher, of Economy India,
Author of the Books–‘ A Crusade against Corruption’, ‘A Dialogue on System Change’, Vyavstha Parivartan, Ek Vimarsh