Insolvency and Bankruptcy Code (IBC) 2016 - Everything you need to know - YouTube

Friends, you might have noticed that many companies go under insolvency and bankruptcy

and when they list back, their share price jumps a lot

After which many retail investors asked about this and the origin of it

And will discuss some examples that have come out of IBC

I, Jagdeep Singh welcome you to today's interesting video, subscribe to Groww so that you don't miss our updates

So let us start today's video

Bankruptcy is unfortunate. But it is also a necessary tool for corporate distress resolution in the business ecosystem

And there is no shame if they file for bankruptcy under the laws

Around the world, especially in developed economies, bankruptcy is treated as a part of the capitalistic system

It is still not well-established in India, but after IBC many companies have come ahead

Before the IBC, the insolvency and bankruptcy laws in India were multi-layered and fragmented.

Meaning there were a different set of rules for individuals and companies, it was complicated and multi-layered

The government attempted to consolidate the earlier framework by creating a single law for insolvency and bankruptcy.

IBC was introduced in the Lok Sabha in 2015, was passed by the Lok Sabha and the Rajya Sabha by May 2016 and implemented by Dec 2016

And it is time-bound, meaning a company has to complete the process in 180 days

and can be extended by 90 days if all the creditors agree

For start-ups (with assets less than Rs. 1 Cr), the process should be completed within 90 days and extended by 45 days.

It addresses the market imperfections and plugs the information asymmetries, enabling the “freedom to exit” for commercial entities

Now let us try and understand how the IBC ecosystem works

There are four pillars to the IBC Infrastructure or ecosystem that make it more efficient

Insolvency Professionals (IP): A regulated and licensed professional, responsible for managing and overseeing the process

Information Utilities (IU): Regulated and licensed repositories of information, they collect, collate, authenticate, and disseminate financial information

Adjudicating Authorities (AA): Specialized tribunals tasked to ensure the insolvency, liquidation, and bankruptcy process is being performed as per IBC

Insolvency & Bankruptcy Board of India (IBBI): a unique regulator that regulates both the professionals involved and the transactions conducted

and in short is a regulator that oversees IPs, IPAs, IPEs etc

Let us now understand Corporate Insolvency Resolution Process (CIRP)

The CIRP process starts with applying to the AA and ends with the order of the AA either approving or rejecting the plan

Then after a moratorium period, CIRP is commenced by the formation of the Committee of Creditors (CoC).

After that, if the resolution plan is approved, the implementation process starts

However, if the plan is not approved by the CoC, an application is made to the NCLT. After that, the liquidation process begins

This benefits the companies when they are under a lot of debt and banks benefit as their debt is recovered

Let us see some companies that went through IBC and now are bought by other companies

The first is Essar Steel that had a debt of 49000 Cr, applied to NCLT in June 2017, resolution done in Dec 2019 and recovery amount was 42000 Cr

The next is Bhushan Steel, applied to NCLT in July 2017, with debt of 44000 Cr, resolved by May 2018 with the recover amount of 36400 Cr

Another Bhushan power and steel applied to NCLT in June 2017 with a debt of 49200 Cr, resolved in March 2021 with the recovery amount of 19350 Cr

Reliance communications applied to NCLT in June 2019 with a debt of 33000 Cr, resolved by Jan 2020 with the recovery amount of 23000 Cr

The recent is DHFL with a debt of 87000 Cr applied to NCLT in June 2019, resolution passed in Jan 2021 with 33% to be recovered in 5 years

Now let us understand the challenges/ problems that the regulatory bodies need to pay attention to

While it is a positive step to corporate distress resolution, witnessed few cases that the haircuts agreed by the banks are 94%

That means on a loan of INR 100, the bank got back only 6 rupees.

Is it right going forward like this as this would make their balance sheets bleed

and these PSUs can face a very big capital problem

So we can deduce that if it continues, government would have to infuse more into these PSUs

It can be a better process, if this issue is solved

So, finally, there is no doubt that IBC has a long way to go in the Indian economy.

And if these problems/issues are addressed properly in the coming times, it can be a good boost to the Indian economy