Business Research Methods

Research work on

Insolvency and Bankruptcy Code 2016


Submitted to: Submitted by:

Dr. Sonal Thukral
Parth Sharma

Assistant Professor
2K18/MBA/057

Delhi School of Management

Delhi School of Management

Delhi Technological University Delhi Technological University

Research Paper Name:

Insolvency and Bankruptcy Code: A lair of trust for creditors

Or

IBC: Improving Credit Worthiness of Indian Companies

Abstract:
This research paper will zero in on Insolvency and Bankruptcy Code’2016 and its
implications on the Indian Economy, its affected counterparts. This research will
focus upon how the markets scenario was before the implementation of IBC and
its effect on the market scenario after the implementation of IBC.

What will be covered?

The following points will be taken consideration to bring about contrast in the
situation before and after the implementation of this law:

Before IBC:

1) How Indian markets were less competitive?

2) Problems in giving loans

3) Poor credit ratings of Indian companies

4) Trust issues with Indian companies

5) Bankruptcy law was there, but even though the company is going in losses,
there was no arrangement to pay back the money, no strict mechanism to cope
with the wilful defaulters.

These points will be contrasted with the current scenario after the implementation
of the law with the help of data collected from various sources like datasets
available online ,through already conducted researches and empirical researches.

The following points will be covered and the following after effects will be taken
into light:

1) The perspective of credit rating agencies

2) How has it affected the overall ratings of Indian securities in the market

3) Effect on MSME and large enterprises

Review of Literature
The legal framework for insolvency resolution in India went through some structural
changes when the IBC was enacted through a bill in parliament in May2016.

This law particularly overhauls Insolvency and Bankruptcy regime in India,

replacing all laws relating to bankruptcy, some even dating bak to 1924
( Bankruptcy Law Reforms Committee, 2015)

Post IBC, various new institutions had to be set up in the ecosystem for proper
functioning of the code:

1) Insolvency Professionals(IPs)

2) Insolvency Professional Agencies (IPAs)

3) Information Utilities (IUs)

Who are Financial and Operational Creditors?

A financial creditor is defined under Section 5(7) of the IBC to mean

"a person to whom a financial debt is owed and includes a
person to whom such debt has been legally assigned or
transferred”.
An operational creditor is defined under Section 5(20) of the IBC
to mean
"any person to whom an operational debt is owed and includes
any person to whom such debt has been legally assigned or
transferred”.

Operational and Financial Debt

Operational debt as a claim in respect of the provision of goods or services,
including employment or a debt in respect of statutory dues payable to the Central
Government, any State Government or any local authority.

Financial debt is debt, along with any interest, which is disbursed against the
consideration for the time value of money.

About half the financial creditors who filed the insolvency petitions were secured
creditors. But only one of the operational creditors who filed an insolvency petition
was a secured creditor.

It takes an average time of 24 days to dispose, compared to 14 days as visualised

by IBC.

But IBC’s enactment has some loopholes and problems too:

1) The absence of basic information about case hinders the ability of the NCLT to
monitor the efficiency of its own benches

2) No improvement notices in the functioning of NCLT under IBC.

3) Inadequate and inappropriate data can result in erosion of credibility of NCLT.

Empirical Research:

Empirical researches suggest that the economies that did not undertake such
reforms/codes have often resulted in ending up in weak or fractured credit
markets

Some argue that bankruptcy policy cannot be firmly rooted in reality until empirical
evidence about bankruptcy gathered widely and routinely. (Sullivan, Warren and
Westbrook)

Research even shows a positive relationship between functioning of courts and

economic activities.

The literature on bankruptcy has shown linkages between judicial discretion,

variation in judicial procedures and bankruptcy outcomes. (Giammarino and Nosal
1994 and Gennaioli and Rossi 2010)

Comparative analysis:
Before IBC, India was considered a country with greater debtor rights. In creditors,
remedies were there but only restricted to unsecured and operational creditors.

Earlier the creditor had three remedies to recover his claim:

1) Civil Suit

2) Arbitration

3) Petition in High Court for winding up if debtor is a company.

Problems to above remedies:

1) Court system is already in a mess with a backlog of cases.

2) Arbitration is expensive

3) Winding up of a company takes anywhere from 5 to 10 years.

The following table shows filed, admitted, and dismissed cases post
enactment of IBC and cases filed by Operational Creditors.

The table 1 shows that there have been significant operational creditors, few
financial creditors and some of debtors who have filed the petition in a short
period and this shows the need of this code.

The break-up of operational creditors is shown in Table 2.

Publication by RBI, December 2018

According to the report there has been more lending from NBFCs and Micro
Finance Institutions after that have been converted into Small Finance Banks.
NBFCs still maintain their profitability in Q1 of 2018-19 and concerns about asset
liability matches are being addressed.

The year 2017-18 was seen as year of evolution for Indian Banking System.
Reasons are as follows:

1) Foundation of credible resolution architecture was formed, by the passing of

legislative amendment which empowered and direct banks to resolve bad loan
cases, with IBC acting as the pivot in the architecture to resolve stressed cases.

2) Urban co-operative banks were given an opportunity to convert to SFBs,

enabling to carry out wider range of activities.

3) e-Kuber facilitated priority sector lending to priority sector

4) Financial inclusion was reinvigorated by modified Pradhan Mantri Jan Dhan

Yojana (PMJDY)

5) The introduction of newer version of UPI

Among the point which facilitated the money supply the most was the
implementation of IBC 2016 as creditors are now more relieved about the recovery
of loans with more autonomy granted to them for recovery and management of
bad loans.

The framework adopted by RBI with IBC as a pivoting organisation has changed
the regime and the game for the creditors and the borrowers as an environment is
created in which maximum value can be realised from troubled assets bolstered
with early identification of early stages of stress or inability to pay back.

So far, the framework is encouraging and has definitely facilitated the recovery
process as compared to earlier mechanisms like SARFAESI Act, etc.

But, this has led to a lot many liquidation cases too, but theses are due to pending
dues and issues. With IBC giving more power to the creditors, this framework is
and will enable speeder, impartial and more efficient system of recovery than ever
before.

As far as NCLT is concerned, with large number of cases in hand, better

infrastructural facilities need to be added.

News Article:
Newspaper Name: Business Line

Article Name: ‘PSB recapitalisation and resolution of stressed assets under IBC to
improve bank credit offtake’

Review of Literature: After IBC and restructuring/ recapitalisation of PSBs create

an expectancy to improve bank credit off take because of remedial measures and
more money supply by the GOI.

With increase in money supply it will directly increase investment and aggregate
demand in the economy and have a multifold effect.

On 20th February GOI had approved 48,239 crore capital infusion into 12 PSBs,
RBI reduced repo rate by 25 base points.

Reports suggest that YoY growth has also increased form 11% in 2018 to 14.4%
in 2019.

Credit growth to Industry has also increased to 15.2 percent in Feb 2019 from 4%
in Feb 2018 from negative rates before 2017. However, credit to agriculture sector
is still moderated at 7.90% in Feb 2019 from 12.8% in Feb 2018.

Article: Banks' recovery improves after insolvency code, changes in Sarfaesi:

Report

Review of Literature: According to Trends and Progress Report published by RBI in

the last week of 2018, it clearly shows that recovery of Indian Banks have
improved in 2017-18.

For 701 cases admitted under NCLT, claims admitted on 21 accounts for an
amount of Rs 99 Billion, Rs 49 Billion has been recovered, which is approximately
50% of the money has been recovered.

Cases referred in 2017-18

Institution Cases filed Recovery

Lok Adalats 3317897 Rs 18 Billion

Debt Recovery Tribunal 29551 Rs 72 Billion

Sarfaesi 91330 Rs 265 Billion

Analysis of credits given for the year 2015-2016 ( Year before IBC )

Credit to sensitive areas (2015-2016)

Credit sensitive areas like capital market and real estate accounted for around
20% of total loans and advances by SCBs. FBs were the highest lenders at 27.7%,
followed by PVBs at 26.3% and PSBs at 16.9%. And among these two sectors
credit was majorly given to real estate with 92.5% rate. We can clearly see in the
graph that credit to both these sectors saw deceleration.

Analysis of credits given for the year 2017-18 (Post IBC)

Credit to Sensitive Sectors (2017-2018)
Credit to sensitive areas ( Real estate and Capital Market) increased in 2017-2018
after a mild declaration in 2016-17, showing revival in housing sector and financing
of IPOs.

Hypotheses Testing

Hypothesis :
H0: IBC increases the amount creditors are willing to give credit to Indian
companies/firms

H1: No change in credit giving to Indian companies/firms

H2: IBC decreases the amount of credit given to Indian Companies

Data showing improvement in credit lending in capital market and real estate
market before and after implementation of IBC.

In the year 2016-17, we can clearly see that percentage variation is of 12.7% in
PSBs lending which is a big leap from the last year as seen in the table and even
private sector banks lending by 3.4%, foreign banks lending by 23.3% and
Scheduled Commercial Banks lending has gone up by 8.8% in the capital market.
This shows that now banks are more willing to give credit in the capital market
after the implementation of IBC in May 2016.

In the year 2017-18, now keeping public banks aside due to higher NPAs in that
phase due to more disclosures about the insolvent positions of firms due to IBC,
private sector banks showed a phenomenal increase by 22.8% in the year
following the implementation of IBC, this definitely increases the confidence of
banks to lend money in the credit market. Let alone capital market, real estate saw
an increase by 20% and commodities saw in increase of 21% in the year 2017-18
by the private banks.

Here, although foreign banks have shown negative percentage variation, that is
due to the news of NPAs in India widespread in the World Economy.

Hence, Hypothesis is not rejected. We accept the null hypothesis

Conclusions:
Going through the literature about IBC and data supporting the insight that IBC’s
implementation can increase the credit lending to the Capital Market and Real
Estate Market, we can see an increase in the amount of credit advances in the
Capital Market.

Moreover, a decrease in NPAs can be seen as creditors have a mechanism of IBC

in NCLT where they can take the defaulters in the tribunal and seek redressal
measures and for the first time creditors can now initiate insolvency proceedings.

Implications for further research:

On the basis of this research work, further studies can be done to check whether it
has increased creditors confidence in credit market.

Moreover research can even be conducted on the infant bond market and debt in
India as to how it will change the debt market dynamics with IBC’s strong hold, its
robust model and functioning and will new innovations in the debt market can take
place with IBC coming in handy.