Context

The newly-created National Asset Reconstruction Company (NARCL) in the public sector offers hopes for the faster clean up of lenders’ balance sheets.

Features of National Asset Reconstruction Company (NARCL)

• The newly-minted ARC, NARCL is not a bank, but a specialised financial institution to help resolve the distressed assets of banks.
• Faster aggregation: Its greatest virtue lies in the faster aggregation of distressed assets that lie scattered across several lenders.
•  Soverign assurance: Its securitised receipts (SRs) carry sovereign assurance.
• This is of particular comfort to PSU banks as price discovery would not be subject to later investigations.
• Focus on large accounts: It would initially focus on large accounts with debts over Rs 500 crore.
• IDRCL: All eyes will be focused on IDRCL (Indian Debt Resolution Company), the operating arm, which would be in the private sector.

Past policy measures to resolve the bad debts

• Institutional measures include BIFR (Board for Industrial and Financial Reconstruction, 1987), Lokadalat, DRT (Debt Recovery Tribunal, 1993), CDR (Corporate Debt Restructure, 2001), SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement, 2002), ARC (Asset Recovery Company, 2002).
• The RBI has also launched a slew of measures during 2013-14 to resolve, reconstruct and restructure stressed assets.

Why the measures to resolve the bad debt failed?

• Of the 28 ARCs (private sector) in operation, many are bit players.
• Dominance of few ARC: The top five ARCs account for over 70 per cent of the asset under management (AUM) and nearly 65 per cent of the capital.
• Restructuring as an exception: Financial and business restructuring appears to be more an exception than the norm.
• Nearly one-third of debts are rescheduled.
• This is not much value addition to what lenders would have otherwise done at no additional cost.
• Success and shortcomings of IBC: The IBC, introduced in 2016, was landmark legislation and marked a welcome departure from the earlier measures, with a legally time-bound resolution.
• The focus is on resolution rather than recovery.
•  It nearly put an end to evergreening.
• Even though there are delays under this newfound promise, they are counted in terms of days and not years and decades.
• The NCLT (National Company Law Tribunal)  is the backbone of the IBC, but lamentably is starved of infrastructure and over 50 per cent (34 out of 63) of NCLT benches were bereft of regular judges.
•  Even the parliamentary committee has expressed indignation on a large number of positions left vacant.
• This lack of adequate infrastructure, coupled with the poor quality of its decisions, has proved to be the IBC’s Achilles’ heel.
• We need judicial reforms for early and final resolutions.
• Issue of delayed recognition and resolution: Forty-seven per cent of the cases referred to the IBC, representing over 1,349 cases, have been ordered for liquidation.
• Against the aggregate claims of the creditors of about Rs 6.9 lakh crore, the liquidation value was estimated at a paltry Rs 0.49 lakh crore.

Suggestions to make IBC more effective

• Delayed recognition and resolution: Lenders and regulators need to address the issue of delayed recognition and resolution.
• Business stress and/or financial stress needs to be recognised even prior to regulatory norms on NPA classification.
• Dealing with anchoring bias: The tendency to make decisions on the basis of first available information is called “anchoring bias”.
•  The first available information in bidding for distressed assets is the cost of acquisition to ARCs.
• Potential bidders would quote prices nearer to this anchor.
• Nobel Laureate Daniel Kahneman has suggests a three-step process to mitigate anchor bias: One, acknowledge the bias; two, seek more and new sources of information, and three, drop your anchor on the basis of new information.

Way forward for NARC

• Forbid wilful defaulters from taking back distressed asset: The IBC has made considerable progress in bringing about behavioural change in errant and wilful defaulters by forbidding them to take back distressed assets.
• Otherwise, the credit culture suffers.
• The NARC should uphold this principle, not dilute it
• Introduce Sunset clause: It should have a sunset clause of three to five years.
• This will avoid the perpetuation of moral hazard and also encourage expeditious resolution.
• Deal with anchor bias: Anchor bias needs to be mitigated by better extrinsic value discovery.
• Avoid selling to other ARCs: It should avoid selling to other ARCs.

Conclusion

The RBI has recently released (November 2) a report on the working of ARCs and makes 42 recommendations to improve the performance of ARCs. This article incidentally makes an effort to identify some constraints and offer solutions to improve the performance of ARCs.

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The Insolvency and Bankruptcy Code was amended recently taking into account its creditor centric approach.

Introducing pre-packs for MSMEs

• IBC was amended last week, through an ordinance.
• The amendment sought to address a structural weakness in India’s resolution architecture by introducing the concept of pre-packs for micro, small and medium enterprises (MSMEs).
• The pre-packaged framework involves a privately negotiated contract between the promoters of a financially distressed firm and its financial creditors to restructure the company’s obligations.
•  This contract is negotiated within the IBC architecture but before the commencement of insolvency proceedings.
• Once accepted by creditors, the plan must be presented to the National Company Law Tribunal (NCLT) for approval.

How this framework is different from the existing framework

• A firm’s promoters could have submitted a resolution plan even after it enters the insolvency proceedings, subject to restrictions imposed under Section 29A which clarifies all those who are ineligible for submitting the resolution plan.
• So, the difference in the new framework essentially boils down to the following.

1) Control of the firm

• Under the IBC, upon the initiation of insolvency proceedings, control of a firm is taken away from promoters, and a resolution professional is appointed.
• Now, during the restructuring, the promoter, through the pre-pack, retains control over the firm.
• So effectively, we have transitioned from a “creditor-in-control” model of resolution to a “debtor-in-control” model of restructuring.
• This amendment, which creates a framework for restructuring, without the promoter losing control over the firm, addresses a lacuna in the IBC.

2) Issue of price discovery

• In this arrangement, the is an absence of an open bidding process, such as during the resolution phase.
• This might raise questions over price discovery, especially if value maximisation for creditors is the yardstick to measure the efficacy of IBC.
• This marks a fundamental change in the IBC framework.

Why the changes were needed

• The IBC, while it has strengthened the position of the creditors, had swung to an extreme.
• The resolution architecture as it stood prior to this amendment was perceived as being too creditor-centric.
• Wresting control from the “errant” promoter, comes with its own set of consequences.
• The notion that all business failure is due to the connivance of promoters needs to be reconsidered.
• Firms may be unable to pay their obligations simply because the economic cycle has turned.
• Or projects have not materialised as expected.
• Of the 2,422 cases closed since IBC came into being, 46.5 per cent of the firms have gone into liquidation, while a resolution plan has been accepted in only 13.1 per cent of the cases.
• This indicates liquidation bias.
• At a time when there aren’t enough buyers in the economy, the IBC process would lead to significant value destruction.

How it will benefit both creditor and promotors

• Promoters get to hold on to their firms, and exit the process with more manageable obligations, making this an attractive proposition.
• For creditors, considering the liquidation bias in IBC, as long as the value of the restructured obligation is greater than the liquidation value it makes sense to choose this option.
• Moreover, this entire process remains outside the restructuring framework of the central bank.
• And, considering that the pre-packs encompass all financial creditors, as opposed to RBI’s restructuring schemes which deal only with banks.
• This takes into account the concerns of other financial creditors as well.

Consider the question “How far IBC has succeeded in improving the insolvency regime in India? How the concepts of pre-packs is different from the previous system?

Conclusion

This approach will help clarify issues, bring about greater certainty to the process. And, once the creases are ironed out, it will create a permanent mechanism for restructuring debts.

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Following the lockdown, the government announced the suspension of some provision of IBC to soften the blow of economic crisis. Section 10A was inserted to suspend the provision. But it giver rise to other questions. What are these questions? Read the article to know…

What changes were made?

• In mid-May, the Finance Minister announced that the government was planning to bring in an ordinance to suspend provisions enabling filing of fresh insolvency cases for a period of one year..
• Finally, on June 5, the government promulgated an ordinance which inserted Section 10A in the IBC.
• The government said the ordinance was promulgated because the lockdown has caused business disruptions which may lead to default on debts pushing such companies into insolvency.
• Therefore, it felt that suspending Sections 7, 9 and 10 of the IBC would be the right course of action.

What are the issues with section 10A?

• Section 10A provides that “no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from this period, as may be notified in this behalf”.
• This means that these provisions shall remain suspended from March 25 till September 25, unless extended for another six months, which would extend the suspension up till March 25, 2021.
• However, the proviso to the section states that no application for insolvency resolution shall ever be filed against a corporate debtor for any default occurring during the suspension period.
• While the main Section 10A suspends such applications for a limited period, the proviso enlarges the scope to provide complete amnesty under the IBC for any default occurring during such period.
• The role of a proviso in a statute is to restrict the application of the main provision under exceptional circumstances.
• However, the proviso here expands the substantive provision in the main section.
• Further, if the main provision is unclear, a proviso may be given to explain its true meaning.
• In this case the main provision appears clear, only to be obfuscated by the proviso.
• The proviso therefore does not appear to be legally tenable.
• As creditors can still approach courts, and as banks/FIs can still approach Debt Recovery Tribunals, the protection given by this proviso seems illusory.
• But Section 10A also suspends provisions of Section 10 of the IBC which enables voluntary insolvency resolution.
• This is difficult to understand as such voluntary insolvency resolution should have been made easier for companies facing distress.

Painting all defaults with the same brush

• The ordinance appears to consider every default occurring during the suspension period to be a consequence of the pandemic.
• There could be cases where defaults were imminent due to other reasons, but which will now still enjoy this protection.
• The ordinance should have protected only such defaults which may occur as a direct consequence of the pandemic or the lockdown and should have left this determination to the National Company Law Tribunal.
• Also, a company defaulting on its payment obligations on March 24 (a day before the lockdown started) would not be provided any relief under the IBC as compared to a company defaulting on or immediately after March 25 due to similar reasons.
• This makes the suspension, in the absence of definition of a COVID-19 default, prima facie arbitrary.

Issue with increasing the default amount limit

• Earlier, the government increased the minimum default amount to trigger corporate insolvency resolution from ₹1 lakh to ₹1 crore.
• This was purportedly done to protect MSMEs from insolvency petitions.
• However, this also operates against such MSMEs because they will now be forced to approach civil courts to recover undisputed debts below ₹1 crore.
• The suspension of these provisions would now impact even claims above ₹1 crore for at least six months to a year.

Conclusion

The ordinance has opened itself up to a legal challenge on grounds of arbitrariness and untenability of the proviso due to the flaw in its drafting. It is unfathomable how these flaws arose despite the government having ample time to think this through.

B2BASICS:

 Insolvency and Bankruptcy Code, 2015

The code contains a clear speedy mechanism for early identification of financial distress and initiates revival/re-organisation of the company if it is viable.

Timeline

• The bill proposes a timeline of 180 days to deal with the applications for insolvency resolution with an option of extending it by 90 days for exceptional cases.

Insolvency Resolution Plan

• The insolvency resolution plan has to be approved by 75% of the creditors. If the plan is approved, then the adjudicating authority will give its sanction. In case of rejection of insolvency resolution plan, the adjudicating authority will pass an order for liquidation.

Insolvency Professionals (IPs) & Insolvency Professional Agencies (IPAs)

• The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.

Information Utilities

• Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.

Bankruptcy and Insolvency Adjudicator

• The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
• The Debt Recovery Tribunal (DRT), which has jurisdiction over individuals and unlimited liability partnership firms. Appeals from the order of DRT shall lie to the Debt Recovery Appellate Tribunal (DRAT).

Insolvency regulators

• The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

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In this article the author suggests a new approach to deal with multiple bankruptcies and stressed assets that would come up post COVID. So, what is the new approach and how it is different from the existing IBC? Read further.

Why is speed of resolution important?

• First, because it is the only way to revive the economy.
• As revenues have dried up cash flow problems have cascaded down the supply chain.
• Firms will consequently be unable to restart production unless they first get credit to pay their suppliers and workers.
• But impaired firms cannot get credit and impaired banks cannot provide it.
• So, the entire economy will be stuck unless the balance sheet problem is sorted out.
• Second, speed will also minimise the losses from the COVID crisis.
• The value of bankrupt firms decays rapidly over time, and the bill for this loss will have to be borne ultimately by the government.
• So, speed is necessary to contain the damage to the government’s financial position, which has been badly eroded by the COVID crisis.
• But moving quickly will be difficult.
• The only real mechanism that currently exists to handle stress and bankruptcy is the Insolvency and Bankruptcy Code (IBC) system, which has been suspended for six months.

Why the IBC cannot help much?

• Many have therefore argued for bringing the IBC back into operation as soon as possible.
• Why such a strategy would not be very effective? The system is slow, with many cases taking two years or more; it could easily become overwhelmed completely if it is forced to absorb a large new set of bankrupt firms.
• In addition, the IBC envisages that banks maximise their recoveries by auctioning off the bankrupt firms to the highest bidder.
• But in a nation and indeed a world, where all balance sheets are damaged, it is not obvious who would be able to buy these firms, or at what prices.
• So recovery rates from sales could be low, undermining the objective of the exercise.
• Even if strong bidders could be found, there is a fundamental political, even philosophical, question of whether it is really right to take these firms away from their promoters.
• After all, many of these firms did nothing wrong; they got into financial difficulties because of the corona crisis.

So, what is the solution?

• What is needed is a new set of procedures that can utilise much of the existing IBC framework, but are simple, straightforward, and prompt, with a built-in expiry clause.
• Let’s Call them Special Non-Adversarial Procedures (SNAP).
• As soon as the lockdown is largely over, the IBC creditor committees (CoCs) could meet to assess the new wave of NPAs.
• The largest, most complex cases — say, those with debts exceeding Rs 10,000 crore — would be sent to the IBC for regular treatment.
• But all other cases would be eligible under SNAP
• After all, the wider the set of companies that are put back on their feet quickly, the stronger the recovery will be.

How would the SNAP work?

• Under SNAP, CoCs would, over the next three months, examine delinquent firms’ financial records, checking to see whether they are actually viable.
• If so, these firms would be designated as Lockdown Affected Enterprises (LAEs), eligible under SNAP.
• Since the basis of the designation would be that the firm is fundamentally sound but because of COVID impact, an Insolvency Professional (IP) appointed by the CoC would work with existing management (who would continue to run the firm) to arrange for interim finance.
• Then, the IP would assess how much of a debt reduction the firm needs, and within three months would present a specific proposal to the CoC.
• If the CoC can reach a two-third majority in favour of the proposal, the promoter would keep the firm, while the firm would be granted immediately released from bankruptcy.
• Since the National Company Law Tribunal (NCLT) is already overloaded, it would not be involved at all in SNAP.
• If the CoC cannot reach agreement within the three-month deadline, or if at any subsequent point the firm defaults on its newly reduced debt, it would be sent to the IBC for resolution.
• SNAP would be disbanded by end-December 2020.

Checks and balances under SNAP

• Such a system would have a series of checks and balances, to prevent firms from securing undeserved debt reductions.
• Banks would need to certify that defaulters are truly LAEs.
• IPs would need to certify the size of the debt reduction.
• A large majority of creditor banks would need to agree to the IP’s proposal.

What should be the role of the government in SNAP?

• With these checks and balances in place, the government should then commit to two things.
• First, it should provide some legal cover, ensuring that bankers would not be subject to investigations by the anti-corruption agencies, as long as they followed the LAE rules.
• Second, the public sector banks would be compensated for the costs of the reduction in the value of the asset, automatically and fully.

Major advantage of SNAP

• Besides speed, SNAP would have one further major advantage.
• It would reduce the adversarial nature of the IBC process, arising because promoters are forced to cede their firms.
• Under the proposed system, promoters would not only have incentives to cooperate; they would actually want to take the initiative, applying for LAE designation themselves, in the hopes that they could get back to business as soon as possible.
• Such a system might seem difficult to envisage, but it is certainly feasible: It is a design feature under Chapter 11 of the American bankruptcy act.
• If SNAP succeeds, some of the special procedures could be introduced permanently into the IBC framework, adding a new dimension: Not just liquidation and rehabilitation under new promoters but rehabilitation under existing management.

Way forward

• After SNAP, repair of the financial system would have to go back to addressing the long-standing problems, which will have been aggravated by the crisis.
• Firms that were unviable even before the COVID crisis would be sent directly to the IBC, but with the IBC reformed.
• The government should issue guidelines focusing on the following three-
• 1. Focusing the COCs on the goal of maximising value, disregarding non-commercial objectives.
• 2. Directing the NCLT courts to focus on the CoCs’ adherence to the procedure rather than on the merits of their decisions.
• 3. Increasing competition in the auction by allowing promoters to bid for their assets, as long as they have not been declared wilful defaulters.
• For the power and real estate sectors, a sui generis approach via the creation of a bad bank is still the best way forward.
• Real estate resolutions need to take into account the interests of home-owners, something that is almost impossible to do under the IBC.

Consider the question, “Economic revival after the pandemic would require some tweaks in the IBC as it was not designed to handle such situations. Suggest the ways to handle the bankruptcies more effectively and changes that are desired in the IBC.”

Conclusion

Introducing three-pronged strategy quickly would set the stage for the economic recovery of India:  1) Special, expedited, non-adversarial and time-bound bankruptcy procedures (SNAP) for COVID-affected firms 2) A reformed IBC focused squarely on loss-minimisation 3)Bad banks for stressed assets in the power and real estate sectors.

Back2Baciscs: What is Insolvency and Bankruptcy Code-2016?

1. The Code creates time-bound processes for insolvency resolution of companies and individuals.  These processes will be completed within 180 days.  If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors.
2. The resolution processes will be conducted by licensed insolvency professionals (IPs).  These IPs will be members of insolvency professional agencies (IPAs).  IPAs will also furnish performance bonds equal to the assets of a company under insolvency resolution.
3. Information utilities (IUs) will be established to collect, collate and disseminate financial information to facilitate insolvency resolution.
4. The National Company Law Tribunal (NCLT) will adjudicate insolvency resolution for companies.  The Debt Recovery Tribunal (DRT) will adjudicate insolvency resolution for individuals.
5. The Insolvency and Bankruptcy Board of India will be set up to regulate functioning of IPs, IPAs and IUs.

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This article argues the suspension of IBC for six months. The issues arising out of suspension like damage to the creditors are also dealt with here. Reading of this article will help us understand the finer details of IBC that are relevant from the UPSC point of view. We have also covered one article from livemint dealing with the same issue, but that article covered the issue in a broader sense.

Who are operational and financial creditors?

• After the lockdown is over, several companies are likely to default on their dues to both operational and financial creditors.
• Who is a financial creditor? The financial creditors include banks and others who have given financial assistance to a company in the form of loans and debentures.
• According to a 2018 amendment to the Insolvency and Bankruptcy Code (IBC) 2017, flat purchasers are also deemed as financial creditors.
• An operational creditor is just about anyone who has to receive money from a company.
• The IBC provides a fast-track mechanism to deal with companies which are unable to repay their creditors and have become financially unviable.
• Section 22 of the Code mandates the appointment of a Resolution Professional (RP) who is expected to miraculously turn around the company in 330 days.
• If this attempt fails, the company goes into liquidation.

The two types of creditors were in the news, so pay attention to these terms.

Increase in threshold limit to file an insolvency petition

• The IBC’s provisions have been extensively used by various creditors whose dues were not paid.
• What was the threshold limit? Initially, the threshold limit was just Rs 1 lakh and the IBC became an effective recovery mechanism for all operational creditors.
• What is the limit now? Just before the lockdown, the finance minister raised the threshold for invoking the insolvency provisions to Rs 1 crore.
• This limit was raised to prevent proceedings being initiated against small and medium enterprises.

Possibility of the domino effect after the lockdown is over

• After the lockdown, several enterprises, large, medium and small, might not be able to pay their dues, at least in the short-term.
• The easiest way for a creditor to recover money is to initiate insolvency proceedings against the debtor company and threaten it with liquidation.
• The shutdown of business after the lockdown could have a domino effect.
• How would the domino effect come into play? If an auto-manufacturer has shut down its operations, the ancillary units will not get their dues.
• This would then lead to non-payment to downstream vendors and service providers as well.
• It might take at least three to four months for the situation to stabilise.

Steps that should be taken to avoid the domino effect

• Moratorium on the IBC: The most important, and immediate, step that needs to be taken is to have a six-month moratorium on the IBC.
• It may be necessary to promulgate an ordinance suspending the prospective operation of Sections 7 and 9 of the IBC so that no fresh petition is filed against a company.
• Impact on creditors: While this could hurt some of the creditors, the damage that could be done to the corporate sector by invoking the IBC is likely to be far greater.
• A distressed creditor is not without a remedy as he can always approach the civil courts for relief, which will not be so severe on a defaulting company.
• If an insolvency petition is filed and the RP appointed, it is difficult to stop the insolvency process.
• The IBC requires a financially-stressed company to be taken over by a financially-sound
• For example, Essar Steel was taken over by ArcelorMittal and Bhushan Steel was taken over by Tata Steel.
• In the current scenario, it will be difficult, if not impossible, for an RP to find a suitable buyer and the only option would be to liquidate the company.
• Using the insolvency process to recover dues is contrary to the IBC’s objectives.

The objective of the IBC is not just insolvency but the reorganisation of companies, maximisation of value of assets and the need to balance the interests of all stakeholders. Pay attention to this point.

How the suspension of the IBC will be beneficial?

• Suspending the IBC for a short period would enable several companies to return to normalcy.
• It will help them function without the constant threat of an insolvency application and its Board of Directors and management being taken over by the RP.
• Moreover, the National Company Law Tribunal benches will simply be unable to take any additional workload.

Conclusion

Suspending the IBC for six months would be a much-needed step to prevent further damage to the economy. It would be in the larger public interest. Indeed, at this critical stage, permitting the legal remedy of insolvency could be the last nail in the coffin of many companies.

Back2Basics: What is the Insolvency and Bankruptcy Code?

• IBC provides for a time-bound process to resolve insolvency.
• When a default in repayment occurs, creditors gain control over debtor’s assets and must take decisions to resolve insolvency.
• Under IBC debtor and creditor both can start ‘recovery’ proceedings against each other.
• Insolvency and Bankruptcy Code 2016 was implemented through an act of Parliament.
• It got Presidential assent in May 2016.
• The law was necessitated due to huge pile-up of non-performing loans of banks and delay in debt resolution.
• Insolvency resolution in India took 4.3 years on an average against other countries such as United Kingdom (1 year) and United States of America (1.5 years), which is sought to be reduced besides facilitating the resolution of big-ticket loan accounts.

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Context

The IBC has started emerging stronger as it delivered on its promise, passed the constitutional muster, earned global recognition and became the preferred option for stakeholders in case of default.

Demystifying the myths surrounding IBC

Myths about recovery:

Most of the myths surround recovery. Consider the following example for quick appreciation.

• M/s. Synergies Dooray was the first company to be resolved under the IBC. It was with the Board of Industrial and Financial Reconstruction (BIFR) for over a decade.
• The realisable value of its assets was Rs 9 crore when it entered the IBC process. It, however, owed Rs 900 crore to the creditors.
• How much did IBC recover? The resolution plan yielded Rs 54 crore for them.
• Some condemned IBC because the resolution plan yielded a meagre 6 per cent of the claims of the creditors, disregarding the fact that they recovered 600 per cent of the realisable value of the company, which had been in the sick bed for over a decade.
• If the company was liquidated, assuming no transaction costs, the creditors would have got at best Rs 9 crore — 1 per cent of their claims.

The myth that recovery under IBC is dismal

• Let’s examine the myth that the recovery through resolution plans is dismal.
  • Two hundred companies had been rescued till December 2019 through resolution plans.
  • They owed Rs 4 lakh crore to creditors. However, the realisable value of the assets available with them, when they entered the IBC process, was only Rs 0.8 lakh crore.
  • The IBC maximises the value of the existing assets, not of the assets which do not exist. Under the IBC, the creditors recovered Rs 1.6 lakh crore, about 200 per cent of the realisable value of these companies.
  • Why creditors had to take a haircut? Despite the recovery of 200 per cent of the realisable value, the financial creditors had to take a haircut of 57 per cent as compared to their claims. This only reflects the extent of value erosion that had taken place when the companies entered the IBC process.
  • What is the conclusion? As compared to other options, banks are recovering much better through IBC, as per RBI data.

The myth that IBC is sending companies for liquidation:

• • What is the primary objective of IBC: Recovery is incidental under the IBC. Its primary objective is rescuing companies in distress.
  • More number of companies sent for liquidation: There is a myth that although the IBC process has rescued 200 companies, it has sent 800 companies for liquidation. The number of companies getting into liquidation is thus four times that of the companies being rescued.
  • The context for the numbers: Numbers, however, to be seen in context. The companies rescued had assets valued at Rs 0.8 lakh crore, while the companies referred for liquidation had assets valued at Rs 0.2 lakh crore when they entered the IBC process.
  • Looking from the value term angle: In value terms, assets that have been rescued are four times those sent for liquidation. It is important to note that of the companies rescued, one-third were either defunct or under BIFR, and of the companies sent for liquidation, three-fourths were either defunct or under BIFR.

The myth that IBC is resulting in huge job losses

• The next myth is that the IBC is resulting in huge job losses through liquidation. It is misconstrued that 600 companies — for which data are available and which have proceeded for liquidation — have assets (and consequently employment) at least equal to the aggregate claim of the creditors — Rs 4.6 lakh crore.
• Unfortunately, they have assets on the ground valued only at Rs 0.2 lakh crore.
  • Take the examples of Minerals Limited and Orchid Healthcare Private Limited, which have been completely liquidated. They owed Rs 8,163 crore, while they had absolutely no assets and employment.
  • What matters in this context is the assets a company has or the employment it provides — not how much it owes to creditors.
• The IBC process would release the idle or under-utilised assets valued at Rs 0.2 lakh crore, which would have dissipated with time, for business and employment.
• One also needs to consider the jobs saved through the rescue of 80 per cent of the distressed assets, and the job being created by these companies, post-rescue.

What changes IBC has brought?

• Changed the behaviour of debtors: A distressed asset has a life cycle. Its value declines with time if the distress is not addressed.
  • The credible threat of the IBC process, that a company may change hands, has changed the behaviour of debtors.
• Debtors are settling debt at an early stage: Thousands of debtors are settling defaults at the early stages of the life cycle of a distressed asset.
  • They are settling when the default is imminent, on receipt of a notice for repayment but before filing an application, after filing the application but before its admission, and even after admission of the application.
  • These stages are akin to preventive care, primary care, secondary care, and tertiary care with respect to sickness. Only a few companies, who fail to address the distress in any of these stages, reach the liquidation stage.
• Value erosion at the liquidation stage: The value of the company is substantially eroded, and hence some of them would be rescued, while others are liquidated.
  • The recovery may be low at this stage, but in the early stages of distress, it is much higher — primarily because of the IBC.
  • The percentage of companies or distressed assets getting into liquidation is insignificant.
  • Stakeholders should increasingly address the distress in the early stages and the best use of the IBC would be not using it all.

Conclusion

Stakeholders who understand business and have the backing of sophisticated professionals are using IBC with open eyes after evaluating all options. There is no reason to doubt their commercial wisdom. The 25,000 applications filed so far under IBC indicate the value and trust that stakeholders place on the law — the ultimate test of its efficacy.

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