IBC offers impetus to recovery segment of financial markets: Economic Survey
The insolvency and Bankruptcy Code (IBC) has offered fresh impetus to the recovery segment of the financial markets and the reconstruction of failed/distressed assets in the real sector, observes the Economic Survey 2023-24.
Highlighting the achievements of the IBC, the economic survey says in the eight years since 2016, 31,394 corporate debtors involving a value of ₹13.9 lakh crore have been disposed of (including pre-admission case disposals) as of March 2024. The loss of control immediately after admission into the resolution process has led debtors to settle with creditors as soon as the applications are filed with the National Company Law Tribunal (NCLT). A singularly notable fact is that ₹10.2 lakh crore of underlying defaults were addressed at the pre-admission stage. This change in debtor behaviour has been a big boon for banks and other lending institutions. The Code has created an optimal incentive-disincentive mix to facilitate above-board and transparent dealings in creditor-debtor relations.
The Code uses the corporate insolvency resolution processes (CIRPs) to identify the best means to resolve a distressed asset. It has facilitated the successful closure of 4,131 CIRPs until March 2024. 3,171 corporate debtors have been rescued, of which 947 cases have been resolved through approved resolution plans, which brought in a realisable value of ₹3.36 lakh crore. In the resolved cases, the creditors recovered approximately 32 per cent of their claims. This amounted to a recovery of 85 per cent of the fair value and 162 per cent of the liquidation value of assets.
The impact of IBC on the health of the financial markets is evident as it is the dominant recovery route for SCBs today. As per the RBI’s Report on Trends and Progress of Banking in India, 2022-23, the IBC held a share of 43 per cent of the total amount recovered by SCBs in FY23. In the six years since FY18, the IBC has enabled over ₹3 lakh crore recovery for the SCBs, more than what they have recovered through the Lok Adalats, DRTs, and the SARFAESI Act.
The Economic Survey further says that over 3,000 businesses have emerged out of the CIRP, with continued business operations extending the productive use of resources trapped due to financial distress in these corporate debtors.
A study conducted by the Indian Institute of Management, Ahmedabad, reports that the resolved firms that went through the resolution process under the Code have witnessed a significant improvement in their performance in terms of increase in tangible assets and average capex in the post-resolution period compared to the pre-resolution period, the aggregate market valuation of resolved firms rose from around ₹2 lakh crore in the pre-resolution phase to ₹6 lakh crore in the post-resolution phase. There is a substantial increase in total employment and around a 50 per cent increase in the average employee expenses in the resolved firms (listed) in the three years post-resolution. It is hard to find another policy measure that has created winners.
As of March 2024, the total CIRPs ending in liquidation were 2,476. Around 77% of these corporate debtors were defunct at the beginning of the process and were, on average, valued at 7 per cent of the outstanding debt. The liquidation process provides a last window of opportunity for the revival of the asset through a going concern Sale/Compromise/Arrangement to maximise the value rescued. Around 50 businesses have been rescued at this last resort. 586 firms were dissolved at the end of the liquidation process, releasing whatever resources were needed for alternate uses.
Also See: Median recovery for operational creditors only 6% under IBC: Report
