Ease of Doing Business: India’s high ranking in resolving insolvency belies ground realities
In the Ease of Doing Business (EoB) ranking, the one parameter where India has seen sharp improvement is in resolving Insolvency. From 108th place in resolving insolvency cases in 2018 to 52 in 2020, is no mean feat.
The reason for this could be a high recovery rate of 71.6% (of the outstanding amount) that the EoB rankings record for India. That is a huge improvement over 26% recovery rate before the introduction of Insolvency and Bankruptcy Code in 2016.
Another area which has shown improvement is the time for resolutions – from almost 4 years, it has come down to 1.6 years, according to the Ease of Doing Business rankings.
But take these numbers with a caveat. The ranking is based on surveys done in Delhi and Mumbai. And the insolvency numbers in the Ease of Doing Business rankings are based on the experience of Mumbai firms. The reality could be slightly different.
Resolving insolvency: Country-wise performance
| Countries | Overall EoB ranking | Resolving Insolvency ranking | Recovery (%) | Time for resolution (months) | Cost (%) |
| India | 63 | 52 | 71.6 | 19 | 9 |
| New Zealand | 1 | 36 | 79.7 | 16 | 3.5 |
| US | 6 | 2 | 81 | 12 | 10 |
| Singapore | 2 | 27 | 88.7 | 10 | 4 |
| Finland | 20 | 1 | 88 | 11 | 3.5 |
| China | 31 | 51 | 36.9 | 20 | 22 |
| Pakistan | 108 | 58 | 41.7 | 33.6 | 4 |
High recovery: A mirage?
InsolvencyTracker.in did some number crunching to see how things really are. The Insolvency and Bankruptcy Board of India’s (IBBI’s) January-March 2020 newsletter shows that till 31 March, 221 IBC cases were successfully resolved with the debtors acquired by new promoters. These cases saw Rs 3.84 lakh crore financial creditors claim being admitted, of which the creditors could recover Rs 1.77 lakh crore, 46% of the total admitted claims.
If we add the seven cases that saw resolution in April-June 2020 quarter in which Rs 8,330 crore was recovered against financial creditor’s admitted claim of Rs 66,000 crore, then the overall recovery rate comes down to 41%.
Just about 61 resolution cases, or about a quarter of the 221 resolved cases, saw recovery rates 50% or more. A large number of such cases are those with less than Rs 100 crore financial creditors’ dues.
Of all the cases where financial creditors’ admitted dues were Rs 100 crore or more, only 19 of them yielded recovery rate of 50% or more. There were 115 cases (out of 221 resolutions) which saw financial creditors’ claim of Rs 100 crore or more.
A further slicing and dicing of the data shows that there are only a handful of cases with over Rs 500 crore of financial creditors’ claims admitted resulted in recover of 50% or more of that amount. In fact there are 10 such cases, of which four were from the 12 large cases RBI had referred to NCLT for resolution (also called dirty dozen), which saw a recovery rate of 50% or more. There were 67 cases, where financial creditors’ dues were Rs 500 crore or more.
While there are fewer large cases with 50% or more recovery rate, the sheer size of outstanding dues in few of those cases resulted in a skewed but healthy average recovery rate of 45%. These large cases, the Dirty Dozens for example, not only accounted for a substantial outstanding dues but also saw healthy recovery rates. The eight resolved cases of the Dirty Dozen accounted for Rs 2.36 lakh crore or half of the total outstanding dues of the resolved cases. The average recovery rate in these cases was 57.5%. Japyee Infratech (Rs 23,000 crore dues) saw 100% recovery, Essar Steel (Rs 49,500 crore dues), saw 83% recovery, Bhushan Steel (Rs 56,000 crore) saw 63.5% recovery and Jyoti Structures resulted in 50% recovery.
The not-so-large or well-known cases are not yielding the kind of recovery as is being reflected in the Ease of Doing Business Rankings.
Breaking it down
| Resolved cases with recovery rate | Number of cases | Total outstanding (Rs cr) | Total Recovery (Rs cr) | Average Recovery (%) |
| 50% or more | 61 | 1,53,040 | 1,18,547 | 77.5 |
| 30-50% | 49 | 99,926.3 | 39,893.3 | 40 |
| 0-30% | 96 | 2,11,054 | 27,822 | 13 |
| 0-50% | 145 | 3,10,980.5 | 67,715 | 22 |
In Time Warp
The IBBI newsletter further says the average time taken for completion of 221 CIRPs yielding resolution is 415 days – which is less than the 19 months times that the EoB rankings show.
In reality some of the large cases have taken much longer – more than two years — and the 415 days average number might be on account of the fact that in many cases the official count of days could be much lower due to various extensions courts gave.
In the Era Infra Case, which has still not seen any kind of resolution despite the insolvency application being filed way back in June 2017, the courts gave it a 215-day extension on account of various litigation the company got dragged into. The official count of days will not reflect the 215-day delay.
The official time taken figure also don’t count the time elapsed between filing of application and admission of the case by the National Company Law Tribunal (NCLT). In most cases, it takes months and in some even a year or more to get the case admitted.
So, while in the Ease of Doing Business rankings India has shown noticeable improvement as far as resolving insolvency is concerned, in reality the Indian Insolvency system is still marred by lower recovery and unnecessary delays.
