Insolvency cases rise 24% YoY; recovery rate declines, says CareEdge report

Insolvency cases in India have increased by 24% y-o-y in Q2FY23 after slowing down in H2FY21 and FY22, according to CareEdge report. Despite the increase in cases, the number of cases included in the insolvency process continued to be lower compared to the period in FY19 and FY20.

The distribution of cases across sectors has remained broadly similar, compared to earlier periods. The manufacturing sector accounts for the highest share at 39% of the overall cases, followed by the real estate (21%), construction (11%) and trading sectors (10%).

The report said that the overall recovery rate till Q2FY23 was 30.8% implying a haircut of approximately 70%. However, the cumulative recovery rate has been on a downtrend, decreasing from 43% in Q1FY20 and 32.9% in Q4FY22 as larger resolutions have already been executed and a significant number of liquidated cases were either Board for Industrial and Financial Reconstruction (BIFR) cases and/or defunct with high resolution time.

CareEdge report said that IBC has continued to gain in popularity, with close to 6,000 companies being admitted in the insolvency process. Further, a significant number of these cases on a cumulative basis are being filed by the financial creditors (2,531 cases) and the operational creditors (3,008 cases). As of September 2022, the share of financial creditors has decreased, while that of operational creditors has increased. The share of corporate debtors has continued to remain the smallest over the same period.

The implementation of IBC has led to an overall recovery rate till Q4FY22 in India and the rate reached 32.9%. The recovery rate for Q2FY22 stood at 49.2% compared to a recovery rate of 30.2% in Q2FY23 and finally reaching 30.8% at the end of second quarter in FY23. Consequently, for the cases which have been resolved, the creditors have taken a haircut of about 70% on admitted claims.

Delays in ongoing CIRPs

CareEdge said in the report that there have been delays in the ongoing Corporate Insolvency Resolution Process (CIRPs). Out of the 1,944 ongoing CIRPs, there has been a delay of more than 270 days for the completion of the process of 63% of ongoing CIRPs in September 2022. This is a decline of 10 percentage points as compared to 73% in September 2021. Further, the report said that quite a few cases have commenced in the last quarter as the process fall in the ‘more than 90 days but less than 180 days’ segment.

According to the report of the Standing Committee on Finance, the delay in resolution can be attributed to delay in admitting cases to NCLT, unsolicited bids outside the process which delay resolution, subsequent litigations after the resolution plan has been approved, and short-staffed NCLT. In addition, NCLTs also handle cases relating to corporate affairs, M&As, etc.