Healthy demand momentum drives resolutions; however, stretched timelines impacting recoveries
The Insolvency and Bankruptcy Code (IBC) clocked the highest ever resolutions in fiscal 2024, with 2691 cases getting the National Company Law Tribunal (NCLT) nod for resolution plans, a 42% growth over 189 in fiscal 2023.
Of the 269 cases, ~88% are from the backlog of earlier years' admissions. This has been driven by greater investor interest in turnaround of stressed assets as seen in the resolution plan submissions. Appointment of new NCLT members has also aided in higher number of resolution cases.
The moderation in recovery rates2 and stretched timelines played spoilsport, though. The year saw resolution plans with recovery rates of ~27% of admitted claims, lower than ~36% realised in fiscal 2023. Resolution timelines stretched to ~850 days compared with ~825 days in the previous fiscal (see chart 1 in annexure).
With demand durability likely across most sectors, the number of acceptable resolution plans received by lenders under NCLT has increased. Real estate and manufacturing contributed to ~65% of total plans approved for fiscal 2024.
Resolution count in the real estate and manufacturing sectors increased by ~200% and 22%, respectively, in fiscal 2024, compared with fiscal 2023. In the real estate sector, healthy demand growth for residential real estate in fiscal 2024 and expectation of healthy growth over the next two fiscals have sparked interest among resolution applicants. In manufacturing, resolutions for mid-sized and small companies3 were in focus as many larger companies are already resolved.
Says Mohit Makhija, Senior Director, CRISIL Ratings, "The higher case resolution momentum is a result of continuous efforts to improve the resolution throughput rate of IBC through structural reforms, the most prominent being the appointment of 15 additional NCLT members in the later part of fiscal 2023. Progress on other initiatives announced in recent budget, like implementation of unified IT platform for data storage and dissemination through common dashboards to all stakeholders will help in strengthening the data management structures necessary for enhancing higher resolution capabilities over the medium term."
At the same time, delays in admission of cases by NCLT due to the burden of ongoing cases, along with multiple cross litigations between stakeholders, objections filed by promoters and deferred case hearings, are stretching the resolution timelines.
One of the hurdles in maximising recovery and reducing resolution timelines is the load of ongoing cases at NCLT - ~4,400 cases as of March 2024. Lack of a common mediation platform for both promoters and lenders to discuss and find solutions for a quicker settlement was another hurdle.
To reduce the resolution timeline, the Insolvency and Bankruptcy Board of India (IBBI) is mulling the introduction of formal out-of-court solutions such as Insolvency Mediation4, as per the recommendation of the expert committee constituted by IBBI in January 2024. This process would entail mediation pre- and post-admission to seek consensus among stakeholders for settlement, thereby preserving the business value of the stressed company through faster resolutions.
Says Sushant Sarode, Director, CRISIL Ratings, "Delay in resolution not only impairs the asset value but also reduces the chance of its revival. Resolutions over the past three fiscals indicate that a one-year delay in resolution depletes the recovery rate by 800-1,000 bps (see chart 2 in annexure). Hence, initiatives such as Insolvency Mediation and increasing NCLT benches are steps in the right direction towards reducing timelines for resolution, and thereby enhancing recovery rates for lenders." |
