IBC & NCLT Reforms: Salvaging Value, Strengthening the Code for India

By Kriti Upadhyaya —

Source: BenTaylor55’s flickr photostream, used under a creative commons license.

Status: Incomplete — The National Company Law Tribunal (NCLT) handles all cases relating to corporate disputes, and winding up of companies, in addition to insolvency and bankruptcy cases. It also handles some real estate cases, and cases related to some financial service providers. Given NCLT’s case load, there is a need for more NCLT benches. Robust outside restructuring processes also need to be institutionalized to ease the burden on NCLT.

Medium Difficulty: Notification/ Regulation, No Opposition — Requires action by the Ministry of Corporate Affairs, the Reserve Bank of India (RBI), and support of the Indian Banking Association (IBA).

This is the seventeenth installment in a new series of articles on the India Reforms Scorecard: 2019-2024 by the staff and experts at the Wadhwani Chair in U.S.-India Policy Studies. The series seeks to provide analysis on why reforms marked as “Incomplete” or “In Progress” have not been completed, and the impact such reforms can have on specific sectors or the economy at large.

Speedy resolution of non-performing assets (NPAs) is essential for increasing cash flow to the banking system and salvaging the value of sick companies — particularly when considering India’s high level of non-performing assets (NPAs). One of the biggest reforms during the Modi government’s first term was passage of the Insolvency and Bankruptcy Code, (IBC) 2016. With an amendment in 2019, notifications, court rulings, and an ordinance, the IBC is changing the bankruptcy resolution landscape in India, providing the government with new tools to battle India’s NPA crisis. However, despite the positive traction – fine-tuning is still required.

According to the latest Insolvency and Bankruptcy Board of India’s (IBBI) Quarterly – out of the total 2,542 cases admitted for the corporate resolution  process (CIRP), only 156 have been closed through resolution, while 587 were recommended for liquidation. Total recovery of assets is touted at 43 percent, but this includes seven of the 12 big accounts that make up a bulk of the corporate defaults. If we leave out these seven accounts, the recovery rate is only 30.4 percent, not too different from the earlier recovery rate of 27 percent before the IBC was enacted.

Source: IBBI Quarterly, compiled by CSIS Wadhwani Chair staff.

Source: IBBI Quarterly, compiled by CSIS Wadhwani Chair staff.

A recent amendment to the IBC mandates case resolution within 330 days. However, time-lines remain dismal, with big cases like Essar Steel taking more than two years, and more than 59 percent of the total cases in CIRP awaiting resolution. There is a need to increase the number of NCLT benches, and look at other avenues to handle bankruptcy beyond the NCLT.

Need to Increase the Number of NCLT Benches

There are presently 16 NCLT benches. Ideally, the NCLT benches’ strength must match the number of high courts in the country – which are 24. Further, out of these 16 benches, some benches only sit two days a week. Some benches also only have one judicial and one technical member, which is insufficient. There are also single benches which have no technical members at all. Given that there are only 220 working days in a year in the courts, all these factors seriously constrain timely case resolution. Hence, there is a need to not only have more benches, but also ensure there is sufficient judicial and technical members. Currently, there are only 23 judicial members, and 25 technical members across the NCLT benches, while the NCLT has more than 10,000 pending cases (including 2,100+ cases under the IBC). Technical members are critical given the domain expertise required in handling IBC cases.

Need for Outside Restructuring

As of now, NCLT, and more recently, bank-led resolution are the primary modes of NPA resolution. The Sunil Mehta committee in 2018 presented a five-pronged plan for NPA resolution called Project Sashakt. Besides NCLT, it advocated for the following resolution processes:

SME- Led: Loans up to $7 million will be handled using a template approach supported by an SME steering committee.

AMC-Led: The idea is to turn around delinquent firms through mergers and acquisitions facilitated by a fund which also raises money from foreign institutional investors.  Although the government set up a Sashakt India AMC, it was never operationalized. A proposed alternate investment fund — created to raise and inject capital into the AMC — never took-off either.

Asset Trading Platform: The idea is to have an exchange for trading distressed or delinquent companies. Despite initial IBA enthusiasm, it never took-off.

Bank led – Resolution: Approach for consortium lending, where the primary lending bank will ensure resolution within 180 days. The Inter Creditor Agreement (ICA) was to be signed by banks to enable its operation. However, banks have been slow in signing the ICA.

As NCLT is overburdened, there is a need for reform. The ideal resolution process will ensure quick resolution of delinquencies through mergers, acquisitions, or/and restructuring, thereby salvaging value of assets and/or company. Lost causes will be referred to NCLT as a last resort, and receive specialized expertise for a quick, time-bound CIRP, with low liquidation disposals.

Ms. Kriti Upadhyaya is a research associate with the Wadhwani Chair in U.S.-India Policy Studies at CSIS.

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