The Insolvency and Bankruptcy Code Bill passed in the Lok Sabha last week and awaiting final approval of the Rajya Sabha is a ‘watershed’ reform that will facilitate ease of doing business by identifying and resolving cases of insolvencies in India, according to Crisil Ratings.
“It will structurally strengthen the identification and resolution of insolvencies in India. While lenders and asset reconstruction companies (ARCs) are immediate beneficiaries, the code will also significantly improve India’s ease of doing business ranking,” said a Crisil statement, adding the code enhances the right of a creditor to identify insolvency and initiate resolution proceedings through an ecosystem, including new regulator and information utilities.
“We believe the code will instil far greater financial discipline among borrowers. It can also potentially kindle investor interest in lower-rated (below AA category) corporate bonds, which will help in deepening the market. But implementation of the code is critical and the build-out of the ecosystem will take time,” said Pawan Agrawal, Chief Analytical Officer, Crisil Ratings. Over the long-term, it will enhance creditor rights, boost investor confidence and facilitate deepening of India’s corporate bond market. It attempts to simplify legal processes, preserve value for creditors and provide them with greater certainty of outcome.
The agency assessed that for ARCs, the new code, along with 100 per cent foreign direct investments announced in the Union Budget for the current fiscal, will boost capital flows and make them an increasingly important intermediary between lenders and borrowers.
Crisil’s analysis shows recoveries by ARCs have been low, at about 36 per cent, with the average resolution taking about five years.
That is in line with a World Bank study, which said it takes more than four years to wind up a sick company in India, with recovery at just at about 25 per cent, among the lowest in emerging economies. The new code prescribes a much faster timeline of 180 days for resolution.
“Quicker resolution will allow ARCs to churn capital faster. It will also attract investments into the distressed assets space,” said Krishnan Sitaraman, Senior Director, Crisil Ratings.
Crisil’s analysis of recoveries indicate that smaller assets (debt up to Rs 100 crore) have a shorter resolution timeframe because of the greater bargaining power of banks.
It observed that the current asset quality challenges at banks stem from disproportionate exposure to large corporates, and these corporates could continue to take legal recourse to delay recovery proceedings, which would challenge effective resolution within the proposed timeline of 180 days.
