IBC Brought Behavioral Change Among Debtors, Economic Survey Says
The behavioral change among the corporate debtors to settle their dues is one of the far-reaching spill-over effects of India’s Insolvency and Bankruptcy Code (IBC), the government’s latest Economic Survey said.
The “fear of losing control” over the corporate debtor upon initiation of the corporate insolvency resolution processes (CIRP) has nudged thousands of debtors to settle their dues even before the initiation of insolvency proceedings, according to the Economic Survey for 2022-2023.
The survey, which was tabled by India’s Finance Minister Nirmala Sitharaman in the Parliament today, said until 30 September 2022, a total of 23,417 applications for initiation of CIRPs of corporate debtors having underlying default of 7.3 lakh crore rupees ($89.50 billion) were disposed of before their admission into CIRP.
Here are the key highlights related to the IBC in the Economic Survey:
Facilitating The ‘Exit’ Process
The IBC has facilitated the exit of distressed firms. Since the inception of the IBC in December 2016, a total of 5,893 CIRPs had commenced by the end of September 2022, of which 67% have been closed. Of these, around 21% were closed on appeal or review or settled, 19% were withdrawn, 46% ended in orders for liquidation, and 14% culminated in the approval of resolution plans.
The IBC also provides for a corporate debtor to voluntarily liquidate itself subject to the fulfilment of certain conditions. A total of 1,351 corporate persons initiated voluntary liquidation under the code as of end-September 2022.
CIRPs - Sectoral Break Up
Sectoral analysis reveals that 52% of the ongoing CIRPs belong to industry, followed by 37% in the services sector by September 2022.
Within the industry, 74% of the initiated CIRPs was from the manufacturing sector. Of these, the textile, basic metals and food sectors accounted for 48% of the ongoing CIRPs.
In the services sector, 60% of the ongoing CIRPs belongs to real estate, renting and business activities.
NPAs: Recovery For Scheduled Commercial Banks
According to the Reserve Bank of India data, the total amount recovered by scheduled commercial banks under IBC in FY22 has been the highest compared to other channels such as Lok Adalat’s, SARFAESI Act and Debts Recovery Tribunals (DRTs) in this period.
The Economic Survey said in a public auction-based resolution model such as the IBC, the extent of the haircut represents the discount the market demands for acquiring the stressed entity as a going concern. Since significant value destruction may have already happened in these assets, a comparison of realized value with admitted claims may not be a reasonable indicator of the effectiveness of the resolution process, it added.
The survey also said the rate of recovery is contingent on several factors, including the overall macroeconomic environment, perceived growth prospects of the entity and its sector, and the extent of erosion in the intrinsic value of the entity.
As a broad-based recovery gains traction, these factors are likely to turn favorable for financial resolution, it noted.
(Note: $1 = 81.5654 Indian rupees)
