The one big-ticket reform of the Modi government, which evoked universal appreciation, is the Insolvency and Bankruptcy Code (IBC) of 2016. It was described as historic, coming as did after a decade of contemplation and a series of past failures of such mechanisms. It was a structural reform that turned this into a marked-based mechanism in line with global best practices.

Five years down the line, however, it has ended up with a loss of 80% admitted debt claims, and has led to liquidation (closure of business) in 29.7% of cases, according to the latest data provided by the Insolvency and Bankruptcy Board of India (IBBI).

Low Recovery, High Liquidation

From 2016 to 2021 (up to June 2021 for which IBBI data is available), a total of 4,541 cases of Corporate Insolvency Resolution Process (CIRP) were admitted in which (“admitted”) corporate debts amounted to ₹13.94 lakh crore. Until June 2021, only ₹1.82 lakh crore of it, or just 20% of the admitted debt claims, is realisable or realised — a net loss or haircut of 80% debt. The earlier debt resolution process under the Sick Industrial Companies (Special Provisions) Act of 1985 (under which Industrial and Financial Reconstruction (BIFR) functioned) had a recovery rate of 25% – a far better performance in comparison.

That is not all. A very large number of CIRP cases are ending with liquidation, where settlement leads to outright closure of businesses, causing job losses, and debtors getting a pittance. Of the 4,541 CIRP cases, 29.7% have already gone into liquidation. While there is no data on the resultant job losses, debtors have lost (haircut) 95% of their loans.

The two together – loss of credit and loss of business and jobs – mean the economy is getting hurt, something which the IBC seeks to prevent.

Behind the big picture of 80% loss of haircut are many other disturbing developments. While the resolution of 384 CIRP cases (the firm remains a going concern and is taken over by another company) have led to 64% haircut (average for all resolutions), the Videocon case saw debtors booking a loss of 95.3%. In its resolution in June 2021, debtors got just ₹2,898 crore out of the admitted debt claims of ₹61,770 crore. The Ruchi Soya Industry’s case of 2019 is curious, since it saw banks agreeing to book a loss of 65% (settled for ₹4,350 crore against the debt of ₹12,146 crore) and then promptly sanctioning ₹3,200 crore to run the very same sick company (Ruchi Soya) by Baba Ramdev’ Patanjali group which bought it.

The IBC’s another key promise of speedy settlement has gone for a toss too. Instead of settling the cases in 180 days, as its mandate, the IBBI data shows 80% of cases have crossed the limit, with 75% of cases taking more than 270 days.

The Parliamentary Committee on Finance examined the IBC’s performance and submitted its report in August 2021. It expressed serious concerns about low recovery and long delays. It stressed that the “fundamental aim of this statute (IBC) is to secure creditor rights”, and “greater clarity of purpose” is needed for this “particularly considering the disproportionately large and unsustainable “haircuts” taken by financial creditors over the years”. It also asked to fix a benchmark for the quantum of haircuts in line with global standards.

The government’s answer to the panel’s questioning on high haircuts (90-95%) doesn’t reflect its concerns though. In fact, the panel was told that, “the IBC is not designed for haircut but the entire wisdom is lying with the Committee of Creditors” and if Committee of Creditors (COC) doesn’t agree for high haircut then the case wouldn’t go to the adjudicator, the National Company Law Tribunal (NCLT). It also said that “the wisdom of COC (Committee of Creditors) is supreme”. The panel recommended that “keeping in mind the experience gathered so far, there is an urgent need to have a professional code of conduct for the COC, which will define and circumscribe their decisions”.

Government Moves to Dilute IBC

The parliamentary panel’s emphasis on securing creditors’ rights is not only because of high haircuts. It also flagged the 2021 bill to amend the IBC which sought to reverse one of the unique features of the IBC of 2016 – which is, “moving away from the ‘debtor-in-possession’ regime to a creditors-in-control’ regime where creditors decide the matters with the assistance of insolvency professionals”.

The Insolvency and Bankruptcy (Amendment) Bill of 2021 proposed an alternative resolution process to the CIRP, called “pre-packaged insolvency resolution process”, or PIRP, for MSMEs by adding a new chapter, Chapter IIIA. Unlike the CIRP, the PIRP mandates the insolvency and bankruptcy resolution process to be initiated by the debtor (the loan defaulter), not the creditor (who is losing his/her money) and the debtor would run the business in the interim, unlike the CIRP framework under which the management passes to independent resolution professionals. There was also a proposal to increase the threshold of defaults for filing insolvency petition from ₹1 lakh to ₹1 crore.

The apparent reason for this amendment was to provide relief to MSMEs going through financial stress caused by the pandemic disruptions. However, the panel doesn’t mention if it questioned the government on the undoing of the IBC’s foundational principles of ‘creditor-in-control’ and ‘market-based mechanism’ for bankruptcy resolution. Instead, it mentions a written reply from the SME Chamber of India, which supported a “debtor-friendly process” for all insolvency resolutions, even under the existing CIRP framework.

Needless to say, the parliamentary panel sought a “thorough evaluation” of the IBC by revisiting it in its entirety and also observed that the operationalisation of the amendments to the Code “may have altered and even digressed from the basic design of the statute and given a different orientation to the Code not originally envisioned”.

However, on August 3, 2021, the day the report was tabled in Parliament, the government introduced and passed the Insolvency and Bankruptcy (Amendment) Bill of 2021 in the Rajya Sabha through a voice vote amidst din and apparently without any debate. The bill had been passed by the Lok Sabha earlier. The law was notified on August 11, 2021.

The government has been diluting the IBC even before the pandemic hit. In his 2020 book, Overdraft: Saving the Indian Saver, former RBI governor Urjit Patel revealed how the government started diluting the IBC by weakening the RBI’s regulatory powers to resolve stressed assets and many of its ministers calling for insolvency resolution outside the IBC in 2018 and 2019.

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