Insolvency resolution: Share of operational creditors reduces to 48% in Q2

The cumulative share of operational creditors in companies admitted under Insolvency and Bankruptcy Code (IBC) has reduced to 48 per cent at the end of Q2 from 50 per cent in Q1 of FY20.

Correspondingly, the share of financial creditors has risen from 40 per cent to 43 per cent in the same period, data from the Insolvency and Bankruptcy Board of India (IBBI) showed.

The number of cases admitted for Corporate Insolvency Resolution Process (CIRP) has gone up significantly over the last 10 quarters with a major chunk of these cases admitted in the last six quarters, reflecting the acceptance of IBC as an effective debt resolution mechanism. On a quarter-on-quarter basis, the number of cases admitted under IBC rose 17 per cent to 2542 in Q2.

Around 41 per cent of the overall cases belong to the manufacturing sector, followed by the real estate (20 per cent), construction (11 per cent) and trading sectors (10 per cent).  The sectors have remained constant  with  the  previous  quarter,  even  as  the  overall  percentage  number  has  changed.  Within  the manufacturing domain, basic metals (7 per cent) and textiles (7 per cent) sectors  continue to have the largest cumulative number of cases  admitted under the IBC.

Research by CARE Ratings shows that of the 2,542 cases admitted under IBC, 59 per cent of the cases are still in the resolution process. As many as 586 cases have gone into liquidation. Over two-thirds of these cases were under Board for Industrial & Financial Reconstruction (BIFR) or non-operational companies where the resolution value was less than or equal to the liquidation value. Five per cent of the cases were withdrawn under Section 12 A of IBC- the key reason being either the full settlement with the applicant or other settlement with creditors. Six per cent of the total cases have culminated in approval of resolution plans.

“In past, the recovery rate in India was as low as 26 cents to a $1 (or 26 per cent recovery). Post implementation of the IBC, as can be seen in the above table, the recovery rate till date in India has improved to 42 per cent. However, the recovery for Q2 in FY20 has dipped  to 34 per cent, which  is  still  better  than  14 per cent  reported  in  the  last  quarter  (Q1 of FY20). Though the IBC  process  is  time 
bound, many of the larger cases have witnessed significant delays due to various reasons such as litigation. However, this timeline of 300 days is significantly superior to the earlier legal process where it was not unusual for the entire process to take a better part of a decade to complete”, the report by CARE Ratings noted.

At the initial stage, the Reserve Bank of India (RBI) had directed  the  initiation  of  resolution  proceedings  for  12  large  accounts  by  banks.  These 12 companies had outstanding claims of Rs 3.45  trillion compared  to  a liquidation  value  of  Rs 73,220  crore. Resolution plans for seven companies have been approved,  while  liquidation orders were  passed  against two companies. In case  of  Amtek Auto, implementation of the resolution plan failed and hence, the process has been restarted.

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