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Is IBC really a success?

How many times have we read about companies going bankrupt? There maybe multiple reasons for this to happen but the company has to pay off creditors the funds they owe. Creditors too may have to take cut in the amount that they shall receive from corporates.

 

This process usually takes a lot of time. The IBC (Insolvency and Bankruptcy Code) was introduced so that these processes are carried out within a set period of time and as per law. This law was passed specifically to ensure that banks and other creditors are able to recover all outstanding amounts from corporates in a time bound manner.

 

Wikipedia defines IBC as the Code that outlines separate insolvency resolution processes for individuals, companies and partnership firms. The process may be initiated by either the debtor or the creditors. A maximum time limit, for completion of the insolvency resolution process, has been set for corporates and individuals. For companies, the process will have to be completed in 180 days, which may be extended by 90 days, if a majority of the creditors agree. For start ups (other than partnership firms), small companies and other companies (with asset less than Rs. 1 crore), resolution process would be completed within 90 days of initiation of request which may be extended by 45 days.

 

Let us see how the IBC has performed in the first few years of its existence.

 

3312 cases have been offered to IBC so far out of which 1961 are ongoing. 780 cases have resulted in company dissolution, 381 have resulted in a withdrawal of appeal, and 190 are closed by resolution. 780 companies were shut down by the IBC in order to maximize value and get back the credit extended. 780 companies have gone out of business due to the IBC.

 

There is no proper data available to come to a conclusion about job losses due to company closure, but we can make an informed guess. For a company with a turnover of Rs 200 crores, the average number of employees are around 3000-4000. Therefore, for every Rs 1 crore of turnover approximately 20 employees lose their jobs.

 

So far the creditors have claimed an amount of Rs 8.19 Lakh crore, but have been able to recover only Rs 1.73 Lakh crores. A difference of almost Rs 6.46 lakh crores! Can we term this as a success of the IBC? This is after the resolution of some of the biggest cases of IBC.

 

The 7 biggest cases of IBC are Electro Steel, Bhusan Steel, Monnet Ispat, Essar Steel, Alok Industries, Bhusan Power & Steel and Jyoti Structures. These are the biggest cases in terms of the company size and the outstanding amount. However, these amount to only 1% of the total outstanding. Even though they amount only to 1%, but they contribute to the 65% of the total recovery by IBC. If we exclude these 7 cases the recovery is only 10%!

 

When we talk about the liquidated cases, only 51 cases have reached the final stages. The creditors had claimed Rs 9,870 crores and only about Rs 96 crore was receive. That amounts to even less than 1% after a year’s headache.

 

An objective of the IBC was “balancing interest”. By this they mean one must balance the interests of various stakeholders. There is no data in order to measure this and to come to a conclusion. However, a glance at the newspapers tell us about the various inter-creditor issues plaguing the IBC process. The whole process is stuck due to infighting among various creditor groups, which results in no progress.

 

For SMEs, where the loan size is less than Rs 200 crore, and the SME has 3,000 – 4,000 employees, resolution professionals are unable to successfully run these companies due to a lack of industry knowledge. This usually leads to company closure and job losses.

 

Whichever way we look at it – the IBC has not helped banks and businesses in the manner envisioned. A lot of banks have lost capital, interest and goodwill. Many people have lost jobs, many operational creditors have lost a lot of capital. After this first phase of IBC, the question is whether this route for collection of funds is truly worth it? At the end of the day, if a business is able to recover just 10% of what another business owes them, then it’s a major write off for them!

 

The last word is yet to be said about the IBC. What is has done, is forced unscrupulous promoters into clearing all their dues. There are many cases which are not referred to the IBC and are resolved by bankers and operational creditors. At the end of it all – it is all about risk management.

 

The question is whether a person or a company can recover their dues by their own skill or by the IBC. This is what Risk Management is all about! How do you find the best way to insulate your business from any type of risk. Can you forsee these risks before they come? Do you have a solution for them? If not, your business can go from hero to zero very soon!

 

BSE Institute, a 100% subsidiary of BSE India, the world’s fastest and the largest stock exchange, offers advanced business and finance courses for freshers and working professionals. The Executive Program in Risk Management, is designed to help professionals identify and tackle risks.8

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