Is the IBC losing its effectiveness?

On the contrary, it has the potential to change the behaviour of investors, lenders and borrowers to create a more healthy ecosystem for India Inc

There is a growing concern that the Insolvency and Bankruptcy Code (IBC) has taken a bit too long in resolving cases of corporate indebtedness — much beyond the stipulated outer limit of 270 days. The fear, therefore, is whether the IBC will soon be rendered as ineffective as some of the similar laws like the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Sick Industrial Companies (Special Provisions) Act, 1985 or even the winding up provisions in the Companies Act.

A recent study, conducted by three researchers — Surbhi Bhatia, Manish Singh and Bhargavi Zaveri — provides a fresh perspective to this debate on whether the IBC is losing its effectiveness. According to the study, a resolution of a case within 180 days, the first deadline mandated in the IBC, is less than 5 per cent. The probability of resolution of cases increases significantly within 270 days, the second deadline under the IBC, upto between 10 and 30 per cent. And within 360 days of a case being admitted, the chances of resolution are even better at 30 to 70 per cent.

These findings are certainly reassuring, compared to what the earlier studies had indicated. A 2018 study, led by Josh Felman and others had concluded that the 12 large cases, referred to the IBC by the Reserve Bank of India in 2017, could take more than 500 days and smaller cases could take up to 350 days for resolution. At around the same time, Ajay Shah and Susan Thomas came out with a study that suggested there was an 80 per cent chance that a case might not be resolved even after 270 days.

Clearly, the study conducted by Bhatia, Singh and Zaveri has presented a more optimistic picture as far as the IBC’s effectiveness is concerned. Notably, this is also borne out by the data that the Insolvency and Bankruptcy Board of India (IBBI) put out early this year.

According to the IBBI data as on December 31, 2018, as many as 1,484 cases have been admitted so far. Of these, 142 cases or 10 per cent have been closed on appeal or review. Sixty-three cases have been withdrawn, indicating how the borrowers’ behaviour has become more compliant once the cases are taken up under the IBC process.

Seventy-nine or about 5 per cent cases have been closed after resolution. And 302 cases or about 20 per cent, have been closed after liquidation. Almost three-fourths of the cases that have been closed after liquidation are about companies that were either defunct or were languishing at the Board for Industrial and Financial Reconstruction, set up under the Sick Industrial Companies (Special Provisions) Act. This is also a reflection of how the earlier law had failed to bring about quick resolution and the IBC has succeeded in securing a relatively earlier closure for them.

About 61 per cent of these cases — 898 in all — are under different stages of the corporate insolvency resolution process (CIRP). The IBBI data shows that about 30 per cent of them have been registered with the IBC process for more than 270 days. Another 18 per cent of the cases under CIRP have been registered for a period between 180 and 270 days. In other words, almost 48 per cent of the cases under different stages of CIRP have already crossed the second deadline for resolution under the law. This is what should cause concern.

Yet, there are several positive signals emerging from these numbers. One, the IBC process is certain to help India improve its ranking under insolvency resolution process in the 2019 edition of the World Bank’s Ease of Doing Business report. In 2018, the World Bank report had mentioned that resolution of insolvency in India usually takes about 4.3 years. The data now shows there is an improvement and whatever it is worth, India’s ranking in the World Bank Ease of Doing Business index should improve a few notches in 2019.

Two, the IBC process is helping create greater certainty in the minds of investors as also lenders on the timeline for exiting businesses when they become unviable and have to be shut down. This is good news for a country where capital is scarce and needs to be freed up from unviable projects as early as possible. And three, the IBC process has already seen a positive change in the behaviour of borrowers, leading to greater compliance.

It is reasonable, therefore, to suggest that the functioning of IBC so far has not got the kind of credit that is due to it. Not only has it outdone similar laws of earlier years, it has the potential of changing the behaviour of investors, lenders and borrowers to create a more healthy ecosystem for India Inc.