Bankruptcy data reflects pain points in a slowing economy

Data shared by the Insolvency and Bankruptcy Board of India (IBBI), which administers the bankruptcy code and regulates professionals, showed that manufacturers alone accounted for 42% all companies in distress. Companies in the services segment, including hotels, restaurants, transportation and communication businesses, too, face acute financial distress, accounting for 15% of the 2,162 cases before the bankruptcy tribunals.

Asia’s third largest economy grew 6.8% in FY19, with GDP expanding by just 5.8% in the quarter ended March, the slowest in five years. Consequently, India lost the tag of being the fastest growing major economy in the world to China, which recorded gross domestic product (GDP) growth of 6.4% in the March quarter.

Fears of a global recession and mounting trade war tensions between the US and China added to the downside risks to the Indian economy. This has forced the Narendra Modi administration to start extensive consultations with the chiefs of industry and the financial sector, to find a policy response.

“The sectoral breakup of companies facing bankruptcy resolution is a reflection of the trends in the overall economy. Another segment where stress is becoming evident is the automobile sector," said Sumant Batra, managing partner and head of insolvency practice of law firm Kesar Dass B & Associates.

Though the new bankruptcy framework has rescued 120 companies so far, its has enabled financial creditors to recover about ₹1 trillion, or 43% of their admitted claims of ₹2.5 trillion. This indicator will now prompt banks and other investors to make their investment decisions.

The ability to quickly exit a venture with minimal erosion of value to their investment in case the venture fails, is a key parameter that goes into investors’ decision making.

At the end of June, 1,292 cases were pending before various bankruptcy tribunals. Out of this, 445 cases have exceeded the maximum 270-day window for lenders to decide on a resolution plan, due to litigation.

Until the recent amendment to the Code, which sets a 330-day deadline for lenders to decide on a resolution plan, takes effect, courts have generally taken a lenient view to exclude the period lost in litigation from the timeframe to avoid forcing companies into liquidation.

Banks and vendors (operational creditors) have dragged 90% of the 2,162 bankrupt companies to tribunals under the IBC, indicating that the code is benefitting creditors to recover dues. However, defaulting businesses cannot abuse the protection from recovery of dues available during the limited time a corporate rescue is explored by lenders to avoid paying back dues endlessly. This is a big difference that the Code has brought from the earlier system of dealing with industrial sickness under the Sick Industrial Companies Act.

The bankruptcy reform has sought to rebalance the rights of lenders and shareholders of defaulting firms so that the fear of loss of ownership and management control would force the cooperation of promoters in deciding a rescue package. The process is guided by a court appointed professional.