India’s finance minister touts the success of the country’s recently-implemented bankruptcy code — but it still requires significant improvement


  • In a Facebook post entitled “Two years of insolvency and Bankruptcy Code (IBC),” Arun Jaitley said that ₹800 billion worth of funds had been recovered following the resolution of 66 cases by the National Company Law Tribunal.
  • Most of the recoveries, however, were from one account- Bhushan Steel. Tata Steel successfully bid ₹352 billion for the heavily indebted steelmaker in May 2018.
  • The IBC, which has also received praise from former central bank governor Raghuram Rajan, has played a significant role in ameliorating the bad loan crisis at India’s banks, especially the public sector ones.
  • However, in the cases that have been resolved, banks have been forced to take a large haircut. Additionally, there have been delays and a misalignment of incentives amongst creditors and promoters.
As he usually does, India’s Finance Minister Arun Jaitley took to Facebook yesterday to explain the progress of one of the NDA government’s landmark pieces of legislation - the Insolvency and Bankruptcy Code, which was passed in mid-2016.

In a post titled, “Two years of insolvency and Bankruptcy Code (IBC),” Jaitley said that as much as ₹800 billion worth of funds had been recovered following the resolution of 66 cases by the National Company Law Tribunal (NCLT). The NCLT was established as a judicial authority to facilitate resolution proceedings under the new bankruptcy regime.

Most of the recoveries, however, were from one account- Bhushan Steel. Tata Steel successfully bid ₹352 billion for the heavily indebted steelmaker in May 2018.

So far, 4,452 cases have been resolved at the pre-admission stage, involving a cumulative settlement of nearly ₹2 trillion, while 1,322 cases have been referred to the NCLT. Resolving claims at the pre-admission stage prevents a company from declaring bankruptcy and having to undergo judicial proceedings.

Looking ahead to the coming financial year, the finance minister expects around ₹700 billion of additional recoveries to take places as big accounts like Essar Steel, which ArcelorMittal successfully bid for, complete the resolution process.

Jaitley isn’t wrong about the IBC’s satisfactory results. The IBC, which has also received praise from former central bank governor Raghuram Rajan, has played a significant role in ameliorating the bad loan crisis at India’s banks, especially the public sector ones.

A few days ago, the Reserve Bank of India announced that the overall non-performing asset ratio in the banking sector declined for the first time since 2015 in the second quarter of the fiscal year, falling from 11.5% in March 2018 to 10.8% by September 2018. The resolutions under the bankruptcy code have also provided a fillip to the rupee, which has had a stellar last few months in 2018 as foreign investment has rebounded.

However, a lot more work remains to be done. Only a third of the initial 12 large stressed accounts referred to the NCLT at the end of 2016 have undergone some form of resolution. Of the many cases that have been resolved, most creditors have been required to take a large haircut.

Of course, as the adage goes, something is better than nothing, but this stems from the event that not every account has met with enthusiastic bidding. This could partly be due to the fact that even a successful bidder can find itself it the middle of a extensive litigation process, which is what has happened to ArcelorMittal, after some of Essar Steel’s creditors objected to the former’s resolution plan.

Furthermore, resolution plans are decided upon by the Committee of Creditors (CoC), a group of major creditors that excludes suppliers and other stakeholders.

As opposed to the actual owners or shareholders of a company, the creditors’ motivations mainly concern the recovery of their claims, even if it means the liquidation of a business that could be viable following the infusion of capital.

Hence, even though the members of the CoC have a lot more to lose, giving them the power to decide the amount of haircuts required is unfair to other stakeholders with vested interests.

The government has, however, shown that its capable of fixing the law. For example, last year the Parliament voted to give homeowners a say in the resolution proceedings of property developers and construction companies.


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