Coming out stronger. IBC | Firms show marked improvement in post-resolution phase: Study

Firms that have been through the IBC resolution process have significantly improved their performance in the post-resolution period, compared to the period prior to their insolvency, an IIM Ahmedabad research study shows.

The overall performance of the firms had reverted to being productive and efficient, the study said. A data-based analysis, and a qualitative analysis suggested that the firms contributed to the economy through job creation, capital investments, and efficient resource utilisation. However, there was scope for improvement, particularly in the ecosystem, participant, education and awareness of the IBC process.

The study, which looked at the performance of firms before and after the resolution process, concluded that the resolved firms’ profitability, liquidity, activity and turnover ratios had improved in the post-resolution period.

The study is the first major effort to review the functioning of firms that have undergone resolution under the IBC, since its enactment seven years ago.

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Market valuation shoots up

Interestingly, the study notes that the aggregate market valuation of all the listed resolved firms has increased from ₹2 lakh crore to ₹6 lakh crore in the post-resolution phase. “Overall, the results suggest that the market has priced and acknowledged the potential of these firms in the post-resolution period,” the report said.

Average sales had increased 76 per cent in three years since resolution. “While net margins continue to remain negative, the resolved firms have broken even in the post-resolution period (operating margin of 4 per cent as of T+3), which is a significant improvement from the pre-resolution period,” it added.

Average employee expenses increased around 50 per cent in the three years post-resolution — indicating higher employment intensity in the resolved firms (listed. Total employment across firms also increased substantially in the post-resolution period.

Also read: Corporate insolvency. IBBI proposes mandatory audit of insolvency resolution process costs

The study highlighted a 50 per cent increase in the total average assets, and a 130 per cent increase in CAPEX, which indicates the build-up of tangible assets in the balance sheet of these firms.

Liquidity had improved by about 980 per cent in the post-resolution period. Current assets to current liability improved from 1.01 in the year of bankruptcy, to 1.83 in the third year post-resolution, it added.

The IIM study said most companies were satisfied with the resolution process and the post-resolution support provided by the stakeholders. Specifically, productivity and profitability had improved, and were in line with the projected plan. Around half of the respondents had met the projected performance benchmark. More than a third had obtained credit, of which 40 per cent obtained bank financing on reasonable terms. Moreover, about half of the respondents made significant investments in CAPEX and working capital.

AREAS OF IMPROVEMENT 

Participants revealed that the resolution process had become more efficient post the IBC. However, they suggested improvements to streamline the process. For instance, while they were satisfied with interactions with the committee of creditors and NCLT, spill-over issues emanating from government institutions, such as income-tax, customs and RBI for various clearances remained, the report added. 

They highlighted the need of business and domain-specific knowledge screening to ensure appropriate and timely decision-making.

The report specifically called for a grievance redressal mechanism, along with an integrated platform for the stakeholders to address workflow concerns, to reduce the inefficiencies prevalent in the existing process.

 Yogendra Aldak, Partner, Lakshmikumaran and Sridharan, a law firm, said that the lack of effective and active participation of the tax authorities and banks during the preparation of resolution plan and CIRP process causes further post facto issues.

“Issues such as, whether the waiver of loans amount to taxable income? Whether the cost of the resolution plan can be deductible? Whether transfer of business is ‘supply’ under GST? Whether receipt of shares at a low price attracts gift tax? rose earlier, each of which opens the doors to wide range of liabilities.

“On the commercial end, banks continue to take huge ‘haircuts’ when claiming dues under the resolution process. To avoid losses, they are apprehensive of lending to firms/companies which have undergone resolution process. Consequently, intervention of the judicial fora is required for resolution of such challenges,” he said.

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