Insolvency And Bankruptcy Code: Value-Discovery Or Value-Recovery?

In the Indian banking sector’s chase towards better NPA and distressed asset resolution governance, the Insolvency and Bankruptcy Code is a good tool. It surely has brought increased corporate accountability to the overall system. Especially considering what it has achieved so far and what it has taught as limitations so far.

The first objective of the IBC is resolution—saving a business as a going concern through restructuring, change in ownership, mergers, and other methods. The second objective is to maximise the value of the assets of the corporate debtor, and the third objective is to promote entrepreneurship, increase the availability of credit, and balance interests. For regulatory and policy experts, it is worth an exercise to determine if IBC has answered all three objectives and to what effect. There lies the critique.

As an ex-banker recently mentioned, are the low recoveries from IBC due to delays in admitting accounts by the NCLT? This issue is multifaceted and does not have a straightforward answer. Lower recoveries result from a combination of factors, including judicial delays, a lack of technical expertise at various benches, delaying tactics by lenders and former promoters, and other complexities, including the omnipresent 'wheels within wheels'.

It's also important to have a realistic perspective on what the IBC can achieve in terms of recoveries. More crucially, we should also consider whether the IBC should be the sole solution or if corporate debt restructuring or strengthening the ARC route for recovery should also be available options.

But then, the IBC process has been time-consuming and much delayed. But it surely has solved one aspect—bankers' worry about anyone pointing a finger at them for not having done as much as needed to recover their dues. In its seventh year, the law is caught in a maze of litigation, new interpretations, amendments (as many as 84 to date), challenges from stakeholders, and new precedents set by the Supreme Court. The moot question is, while IBC might be a mature step forward, are the stakeholders using it mature enough?

Recovery of loans resolved through insolvency courts remains low, even as the number of cases being admitted is on the rise. In other words, the country’s insolvency mechanism, the IBC, has largely remained ineffective when it comes to the actual recovery of funds. More than half the default cases at the IBC have been languishing for more than nine months without any resolution. Besides, the financial creditors—mostly banks—are usually able to recover only a small percentage of the admitted claims.

Financial creditors have faced a haircut of around 73% on admitted claims under the Insolvency and Bankruptcy Code. The total amount of debt resolved through the IBC since inception is Rs 10.5 lakh crore. Resolutions have remained broadly steady, with the January–March 2024 quarter seeing Rs 48,000 crore of debt resolved, resulting in a realisation of Rs 12,000 crore, or 25%. Additionally, the average time taken for corporate insolvency resolution processes ending with a resolution plan has increased to approximately 843 days as of March 2024, more than double the statutory limit of 270 days. This often results in a worsening in the value of the assets, leading to an even lower recovery for non-operating assets under IBC. The overall IBC resolution rate stands at 32% of claims. 

• Creditors take 200–400 days to file their applications. Delay in filing applications would lead to a loss of value for the asset.

• We have seen examples of old cases being re-filed for different processes. This delays the process as the operations and processes have to be reworked.

• Decisions from the NCLT need to come in quicker. Maybe it is understaffed, but that needs to be addressed urgently.

• There are various concerns and industry conversations on how the process seems ‘hand in glove’ with operators.

• There are many anecdotal examples of friendly bidders buying companies through the IBC process on behalf of promoters. Here, the banks tend to lose.

In insolvency proceedings, efficiency is often caught between the competing demands of quick resolution, equitable treatment of stakeholders, and the preservation of asset value. So, the question is: is the IBC helping in the process of value discovery for banks vs. value recovery?

This also means that banks are stuck with the return of accounts with no sign of time-based IBC closure. Usually, the liquidator covers only his fees and is not worried about bank dues. Isn’t the original intent of ARCs to solve this issue of value discovery and value recovery as a combined objective?

Banks still grapple with non-performing assets because the IBC process often leads to delays and legal bottlenecks. Asset Reconstruction Companies may offer quicker recovery at a more appropriate value, as they specialise in handling distressed assets and can expedite the resolution process compared to the IBC, which may result in near liquidation amounts due to prolonged proceedings. Reassurance from the government and the RBI is paramount, granting banks and bankers the confidence to navigate the commercial framework and pursue restructuring without fear of unwarranted scrutiny.

One must also consider why the ARC sector has not taken off. Is it because of the low capital that the sector holds today, or is it because of their struggles to keep pace with the acquisition funding they need to acquire distressed assets? Or worse off still, is it the regulator’s low trust quotient in the functioning of its regulated ARCs? The answer might be in the combination and severity of these.

Unlike mature markets, where distressed assets can be readily bought and sold, the market in India is still in its infancy. This dearth of a robust marketplace inhibits efficient price discovery and liquidity, making it harder for creditors to maximise recovery from distressed assets. Without a vibrant market ecosystem, the options for resolving NPAs under the IBC become limited, often resulting in prolonged resolution timelines and suboptimal outcomes for creditors. In this landscape, the IBC’s evolution raises a pertinent question—is it a vessel for value discovery or a quagmire inhibiting banks' pursuit of true value recovery?

But this brings up an often ignored and sensitive question: are bankers equipped to take commercial decisions? Bankers are well-versed in making credit decisions, assessing risk, and determining the creditworthiness of borrowers. However, the IBC process requires them to make commercial decisions, which is a different ballgame. For instance, during a corporate insolvency resolution, bankers might need to decide whether to accept a haircut on the debt or explore other restructuring options, such as finding a buyer for the distressed asset. These decisions demand an in-depth understanding of market dynamics, valuation techniques, and strategic business considerations, which are not typically within the core expertise of bankers. Credit and commercial expertise are different.

As cynics would point out, IBC promises a treasure map for distressed assets, but too often it leaves bankers sifting through sand for value. This gap in expertise can be a significant challenge for the IBC process, as it places creditors, who are primarily bankers, in control of crucial commercial decisions. Does the existing vigilance rule push them to take calls that tick-all-procedure boxes rather than maximise financial outcomes in the process?