Essar Steel tried to stay insolvency proceedings against it by moving the Gujarat High Court. But not all Indian companies think along similar lines. Data put out on the website of the Insolvency and Bankruptcy Board of India show that Indian borrowers are gradually taking to the idea of filing for insolvency themselves.
Of the 148 cases approved so far by the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code, 2016 (IBC), more than a third were initiated by the defaulters themselves.
This heartening trend is thanks to the provision under the new bankruptcy code that allows a borrower, who could be a corporate or an individual, to initiate the insolvency-resolution process, once it or he has defaulted on a debt.
This allows a business stuck in the vicious cycle of debt to move on and start with a clean slate. With corporate defaulters themselves triggering the insolvency proceedings, resolution could happen faster.
According to the data, the NCLT has given the go-ahead to initiate insolvency proceedings against 148 borrowers so far. The Tribunal has been in operation for less than a year. Of these accounts, 56 have been filed by borrowers.
Interestingly, the list includes many listed players, including Ennore Coke, Educomp Solutions, Gujarat NRE Coke, Unity Infraprojects, Clutch Auto, LML Ltd, Marmagoa Steel and Roofit Industries.
The market appears to have already factored in the concerns plaguing these defaulters. Their stocks are trading at a very low price — below ₹10 apiece in most cases. Nicco Corporation and Facor Steels are the other listed players against which the NCLT has ordered insolvency proceedings. These stocks are trading at less than a rupee on the BSE.
“If a corporate borrower is unable to pay its creditors, it can also file for a fresh start. Here, again, the application is filed with the NCLT. The NCLT then assesses whether the company is worthy of a fresh start. This is done based on the borrower’s assets and liabilities. “It is then decided on how much the borrower can pay and once that is settled, the debtor can have a fresh start,” says Neha Malhotra, Executive Director, Nangia & Co.
Time-boundUnder the new bankruptcy code, the resolution is time-bound — 180 days with 90 days extension — which can be a win-win for lenders and borrowers. “Even under the earlier structure borrowers could file a petition for winding up, but it was a long process, one considered a taboo,” says Malhotra.
In the past, banks took as long as 15 years in certain cases to recover their money which eroded the value of the assets substantially.
According to a World Bank report, it took, on an average, more than four years to wind up a company in India, which was more than twice the time taken in China and in the US (1.5-1.7 years).
In the process, creditors in India recovered only 25 cents to a dollar, compared to 36 cents in China and a substantial 80 cents in the US.
Many lenders such as Bank of India, ICICI Bank, SBI, Bank of Maharashtra, Indian Bank, and IDBI Bank have also filed for insolvency against defaulters and received NCLT approval. Likewise, asset reconstruction companies such as Alchemist and Edelweiss have also initiated insolvency proceedings against some borrowers and received NCLT approval.