Synopsis: The Insolvency and Bankruptcy Code (IBC) in India has witnessed a mixed performance up to Q1FY25. Despite the IBC's increasing acceptance as a debt resolution mechanism, the overall recovery rate has declined to 32.06%, with resolution timelines continuing to extend. A significant proportion of cases have ended in liquidation, with over 68% of ongoing cases facing delays of more than 270 days.
The performance of the Insolvency and Bankruptcy Code (IBC) in India through the end of June 2024 presents a complex picture, reflecting both progress and ongoing challenges.
As of Q1FY25, the IBC has processed a total of 7,813 cases through the Corporate Insolvency Resolution Process (CIRP), with only 12.9% culminating in the approval of resolution plans.
Meanwhile, 25.3% of these cases remain in the resolution process, showing little change from the 25.4% recorded at the end of March 2024.
Recovery Rate Trends:
The overall recovery rate under the IBC has been on a downward trajectory, falling to 32.10% by Q4FY24, which translates to a significant 68% haircut for creditors.
This trend is notable given the decline from a recovery rate of 43% in Q1FY20.
The decreasing recovery rate is attributed to the resolution of larger cases in the early years of the IBC, coupled with a growing number of liquidated cases that were either Board for Industrial and Financial Reconstruction (BIFR) cases or defunct entities with prolonged resolution timelines.
Despite the challenges, there has been some improvement in the effectiveness of the code, as evidenced by the resolution-to-liquidation ratio.
According to a report by CareEdge, this ratio has improved from 0.21 in FY18 to 0.71 in Q1FY25, thanks to several initiatives aimed at enhancing outcomes.
Timelines and Delays:
However, the timelines for both resolution and liquidation continue to extend.
The average time taken for resolving or liquidating cases has increased for both operational creditors (OCs) and financial creditors (FCs).
As of June 2024, approximately 68% of the ongoing CIRPs have been delayed beyond 270 days, up from 61% in June 2022 and 65% in June 2023.
This indicates a shift towards longer resolution times, with fewer cases resolving within shorter timeframes.
The number of insolvency cases referred for CIRP has increased by about 15% year-over-year in Q1FY25.
Nevertheless, despite this increase, the number of cases admitted remains lower compared to the peak levels observed in FY20.
The distribution of cases across sectors has remained relatively consistent, with manufacturing continuing to dominate the number of cases in the insolvency process.
Sectoral Insights and Liquidation Trends:
Manufacturing remains the sector with the largest number of ongoing cases, and liquidation has become the most common path of closure under the IBC.
Over 2,500 cases, accounting for 32.6% of the total cases admitted, have ended in liquidation.
Notably, over 70% of these liquidation cases were either BIFR cases or defunct entities, underscoring the challenges in resolving legacy issues.
Around 15.3% (1,192 CIRPs) have been closed through appeals, reviews, or settlements, while another 15.3% have been withdrawn under Section 12A of the IBC, primarily due to full settlements with applicants or creditors.
Steady Growth in CIRP Additions:
The initiation of CIRPs saw rapid growth until FY20, with a subsequent decline during the pandemic years of FY21 and FY22.
However, the trend reversed in FY23, with the number of cases surpassing the FY19 threshold.
Although the number of cases in FY24 has been lower compared to FY23, there has been a steady increase in CIRP admissions.
In Q1FY25 alone, around 240 cases were admitted to the insolvency process, marking a 15% year-over-year increase.
This growth highlights the rising acceptance of the IBC as an effective tool for debt resolution in India.
Despite the steady rise in CIRP cases, the number of ongoing cases has remained fairly constant at around the 2,000-case mark over the past couple of years.
The share of CIRPs initiated by corporate debtors has also decreased significantly, while the number of cases initiated by operational creditors has reduced.
In conclusion, the IBC process in India continues to evolve, with both positive and negative trends emerging.
While the overall recovery rate has declined, reflecting the challenges of resolving more complex cases, there has been progress in the resolution-to-liquidation ratio and a steady increase in CIRP admissions.
However, the extended timelines for resolution and the high proportion of cases ending in liquidation remain significant challenges for stakeholders.
As the IBC process matures, it is crucial to address these issues to enhance its effectiveness as a debt resolution mechanism.
Disclaimer: The information provided in this article is for informational purposes only and should not be construed as investment or legal advice. Readers are encouraged to consult with qualified financial or legal advisors before making any decisions based on the information presented.
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