NEW DELHI: The recent acquisition of Videocon Industries and its subsidiaries by Vedanta through the insolvency process for a paltry sum of Rs 2,962 crore against the total admitted creditors claim of Rs 65,000 crore has once again raised question on the efficacy of Insolvency and Bankruptcy Code (IBC) in resolving India’s NPA problem.
Poor recovery in Videocon is not a case in isolation. The insolvency data show that there are many cases where recovery has been abysmally low—less than 20-30 per cent of banks’ claims. The overall recovery rate under IBC has not been a measly 39 per cent in 348 cases resolved till March 31, 2020. Aside from poor recovery, what has not helped the IBC’s cause is a large number of cases going into liquidation. Till March 2021, 1,277 of the total 4,376 companies undergoing insolvency proceedings have been liquidated.
Has the Insolvency and Bankruptcy Code (IBC) then failed the banks and creditors? The chairperson of insolvency regulator, MS Sahoo, in a recent interaction with TNIE said these kinds of haircuts are not unusual in any other jurisdictions. He says the amount shown as creditors claim could be misleading as many times companies under IBC have no assets left. However, he believes things will change as companies in future will come into insolvency in the early stage of distress.
Ajay Shah, an economist and a former professor at National Institute of Public Finance and Policy (NIPFP), says: “The old cases from previous recovery regimes had many firms where a lot of value has been taken out. So, it was always going to be the case that when IBC first came in, the backlog of cases would suffer from a low recovery rate, even if the bankruptcy process was perfect.
There have been positives of IBC too. As many as 17,000 cases of loan defaults involving over `5 lakh crore of loans were resolved even before the insolvency process could be started. The average time taken has also come down to 400 days from four years earlier.
Ex-SBI chairman Rajnish Kumar had said in media interactions that the success of IBC cannot be measured just on the basis of recovery rate. It also depends on the exit route which he says is much better than those provided under SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002).