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Manufacturing, construction, real estate firms bear brunt of bankruptcy action

Insolvency in real estate has increased as home-buyers and creditors drag developers to bankruptcy tribunal for delays which may have been worsened by the pandemic. (Photo: Mint)Premium
Insolvency in real estate has increased as home-buyers and creditors drag developers to bankruptcy tribunal for delays which may have been worsened by the pandemic. (Photo: Mint)

  • These three sectors account for 71% of companies in bankruptcy tribunals
  • Total number of cases admitted by the NCLT so far has increased 3% to 4,541 in June quarter

NEW DELHI : Manufacturing, construction and real estate companies together accounted for seven out of every 10 companies ending up in bankruptcy courts, official data showed, indicating the pain points in the economy. According to figures from the Insolvency and Bankruptcy Board of India (IBBI), 71% of the over 4,500 businesses in bankruptcy tribunals at the end of June were from these three sectors, with trade, transport, and hotels making up the rest.

Manufacturing, construction and real estate also accounted for 68% of the 1,349 companies ordered to be liquidated. And 73% of the 396 companies that managed to stitch together revival plans under the Insolvency and Bankruptcy Code (IBC) were from these sectors.

The share of individual sectors among all companies that end up in bankruptcy tribunals have not seen a major change in the April-June period of this year, the first quarter after India lifted the one-year suspension of the Insolvency and Bankruptcy Code (IBC) at the end of March.

That also applies to sectors such as transport and hotels, among contact-intensive sectors that suffered the most during the pandemic. However, according to experts, given that there would be a lag between possible defaults in payment obligations and bankruptcy action, the impact of the pandemic on these sectors could get more pronounced in the September quarter data.

Experts said insolvency in real estate has increased as home-buyers and creditors drag developers to the bankruptcy tribunal for delays which may have been worsened by the pandemic.

“Builders are also grappling with multiple challenges—Real Estate Regulatory Authority (RERA) requirements and IBC impact and liquidity constraints, as they emerge from the glut in the realty market which started well before the covid-19 pandemic," said Ashish Chhawchharia, partner and national head-restructuring advisory at Grant Thornton Bharat.

Manufacturing sector accounts for about 17% of the gross value added (GVA) in the economy, while construction accounts for about 7%.

In the June quarter, new bankruptcy cases remained low at 126, suggesting that the policy steps introduced to avoid bankruptcies and the subdued market for distressed assets have prevented a surge in new cases after the lifting of the IBC suspension in March.

The total number of cases admitted by the National Company Law Tribunal (NCLT) so far has increased marginally from 4,415 at the end of March to 4,541 at the end of June, a 3% increase. The outcomes of the bankruptcy resolution process under the IBC recently came under focus with policy makers highlighting the high degree of haircuts taken by lenders in some of the cases.

Bankruptcy rule maker IBBI has called for suggestions for further changes in the Code including introduction of a code of conduct for lenders who take over the affairs of a defaulting company. The regulator also proposed changes to the auction process and suggested that the number of revisions to the request for resolution plans be capped at two. In August, the parliamentary standing committee on finance led by BJP leader Jayant Sinha had called for a review of the Code

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