There have been media reports about a pre-pack scheme under the IBC (Insolvency and Bankruptcy Code). If accepted, the idea will need an amendment to the IBC. Reforms are about efficiency and competition. Efficiency, which enhances productivity, also applies to capital markets, and competition requires not just entry of capital, but its exit. If capital is locked up in an enterprise that has failed, that capital is of no use to the economy or to a fresh enterprise. Non-performing assets (NPAs) are just that. They are potential assets, which have become non-productive liabilities.
Since 1991, one has continuously heard the expression “exit policy”, though the frequency of usage seems to have declined a bit. That exit policy was typically interpreted as an exit policy for labour. In practice, it is more often an exit policy for capital. There was of course the 1985 Sick Industrial Companies Act (SICA) and the 1993 Recovery of Debts Due to Banks and Financial Institutions Act. These didn’t work and in May 2016, we had the IBC, amended five times since then. Has the IBC worked? The answer depends a bit on the metric used for evaluation.
Reportage often focuses on companies that have gone through the full process, resulting in a resolution plan or liquidation. For instance, there are 29,514 enterprises with cases under the IBC. There has been a resolution plan in 277 cases and in 1,025 cases, there has been liquidation. Only 7% of cases have gone through the full process. The liquidated values are low, which is invariably reported in the media. For instance, for the 1,025 companies ordered for liquidation, the liquidation value was only Rs 42,362 crore, a mere 7.2% of aggregate claims of Rs 5,88,121 crore.
This is understandable, since 74% of companies ordered for liquidation were defunct. It is therefore possible to look askance at the IBC process and at what it has achieved. The IBC is law and there is a difference in the way lawyers and economists look at the law, because of the different prisms they use. For instance, suppose I burn your house down. Lawyers and judges will approach it with the static prism of determining whether the penalty imposed on me has adequately compensated you for your loss. This is more a one-shot type of prism.
Economists typically approach law with a dynamic and longer-term prism. The issue is not whether I have compensated you enough. The issue is whether law has provided sufficient deterrence for others not to burn down their neighbour’s houses. The preventive aspect of law becomes more important than the punitive. I think there is an analogy, because out of the 29,514 cases filed under the IBC, 14,884 cases were withdrawn before submission; 83% of the cases, with a realisation value of Rs 5,15,170 crore, were resolved before going through the full process.
That’s the reason I said the metric used for evaluation is important. The IBC has proved to be a strong deterrent and its recovery rate compares quite favourably with Lok Adalats, Debt Recovery Tribunals and the 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. This is also the reason why India has shot up in “resolving insolvency” ranks used in the World Bank’s ease of doing business indicators.
But this should not be construed as a suggestion that all is well with the IBC. There have been issues with the law and as jurisprudence evolved, there have been amendments in the statute. No doubt there will be more such amendments. More importantly, the process is through the NCLT (National Company Law Tribunal) and NCLAT (National Company Law Appellate Tribunal), which also handle cases under Companies Act and Competition Act. Consider cases pending admission before the NCLT/NCLAT. Out of the 9,549 cases pending, 5,485 have been pending for more than 180 days.
For companies that are destined to go through the full process, 74% cases have been going on for more than 270 days and 57% have been going on for more than 330 days. This is not what was promised under the IBC. The complete process should be finished in 180 days, with another 90 days of extension.
When I hear complaints about the IBC, usually, they are complaints about the NCLT/NCLAT process. The immediate reaction to something like this is to increase bench strength. This is the standard reaction to anything concerned with speed of the judicial process—increase the number of courts and number of judges. I don’t think that works for the judicial process in general.
Specifically, I don’t think it will work for the NCLT/NCLAT, not unless we have simpler processes and better (read computerised) management of cases. The NCLAT/NCLAT, as with other court-driven systems, approach the issue with an adversarial lens. The IBC isn’t that. For IBC cases, all one requires from the NCLT/NCLAT is a simple order, giving directions, not complicated “judgments” discussing pros and cons and providing rationale. That’s a problem with court judgments in general. Look at the number of appeals that have resulted not from the judgment proper, but from the reasonings given.
I am not a lawyer. But I don’t think anything under the law requires the NCLT/NCLAT to provide rationale. I don’t think anything prevents the NCLT/NCLAT from introducing summary procedures for admission, or placing limits on adjournment or hearing. It can evolve its own procedures and not implant them from the regular court system. I look at the pre-pack system in that light. It’s like a mediation or conciliation process, before going to court, so to speak. A good idea.
Bibek Debroy (Views are personal) (Tweets @bibekdebroy)
Chairman, Economic Advisory Council to the PM