Post-CIRP firms show better corporate governance: Finance Ministry
The firms undergoing the corporate insolvency resolution process have witnessed a significant improvement in their performance in the post-resolution period, says the Indian Economic Review by the ministry of finance.
In the report published on 29 January 2024, the finance ministry cites a study by the Indian Institute of Management: Ahmedabad on IBC that highlights that the resolved firms that went through the resolution process under the IBC have witnessed a significant improvement in their performance in the post-resolution period compared to the period prior to the insolvency. These companies saw an average 76% increase in sales, 50% rise in average employee expenses, 50% rise in average total assets of resolved firms.
It also cites an MS Sahoo’s article on “A Performance Appraisal of IBC” that showcased that the firms have witnessed an improvement in their performance, which led to robust balance sheets with prudent leverage and an interest coverage ratio exceeding 3.5.
Corporate governance, too, has witnessed improvement, as evident in a decline in related party transactions post-IBC, as per a study by the Centre for Advanced Financial Research.
The report says that the enactment of IBC and the amendment to the Banking Regulation Act of 1949 have truly marked a watershed in the evolution of the regime for the resolution of financial stress in India, empowering creditors to deal with troubled financial assets in a transparent and time-bound manner. The IBC has strengthened balance sheets and, in the process, has freed up economic capital that was otherwise rendered unproductive
The finance ministry report also highlighted that India’s global ranking in terms of resolving insolvency parameters improved from 136 to 52 in the first three years of IBC implementation.
Profit margins of the public sector banks (PSBs) started to improve as lending resumed on the back of various measures taken by the government, including recapitalisation. After the record low of 2018, corporate profit margins also increased as the resolution of stressed assets saved cost on debt servicing.
The report also highlighted that IBC facilitated a speedier resolution of bad debt and helped improve the credit repayment culture. The latest data from the Insolvency and Bankruptcy Board of India (IBBI) shows that the IBC has rescued 808 corporate debtors through resolution plans, with realisations of 168.5% against the liquidation value and 32% as against the admitted claims of the creditors.
Also See: Discount broking firm Samco Securities to face insolvency proceedings
