- In yet another sign of the good health of business in India,
insolvencycases are still below FY20 levels, according to a new report.
- Earlier, a report from S&P showed that the credit profiles of Indian companies have improved.
- However, small and medium-sized enterprises remain under pressure.
Business insolvency matters admitted through the Insolvency and
According to the report, 332 cases were admitted to insolvency proceedings in Q1 FY23 – compared to 139 cases admitted in the same period last year. However, the annual run rate is still below the nearly 2,000 cases admitted in FY20.
Kotak’s findings and IBC data are consistent with the findings of rating agency S&P, which noted that four out of five companies in its portfolio have adequate liquidity and that their credit profiles are strong.
The Indian government came up with IBC in 2016 to streamline and speed up the corporate insolvency resolution process. According to data from the Insolvency Commission, IBBI, there were 2,000 active insolvency cases as of June 2022.
Half of IBC cases are being liquidated
Liquidation remained the most popular option for creditors to force the insolvency process. According to the Kotak report, 47% of IBC’s 3,600 cases were liquidated, while only 14% were resolved.
While the IBC stipulates that insolvency proceedings must be concluded within a maximum of 180 days, with an extension of 90 days, the report notes that this does not reflect the reality.
“As of 1QFY23, 61% of pending cases have passed 270 days since admission, and another ~10% exceed 180 days. Therefore, the number of cases facing liquidation is likely to remain high,” the report said.
Overall, total debt resolved through IBC was ₹7.7 lakh crore, despite a 70% haircut by financial creditors.
“As we work through some of the weaker assets where there are incomplete projects or sectors with very poor buyer demand, realizable values have fallen,” the report said.
Operational creditors lead insolvency petitions
Interestingly, operational creditors led insolvency requests rather than financial creditors – according to the report, 50% of cases were initiated by operational creditors and 40% by financial creditors.
Sector-wise, manufacturing dominated IBC cases.
Mid-sized and small businesses most stressed
While the Kotak report underlined that business in India is “comfortably positioned,” it also revealed that SMEs are the most stressed.
“We expect a significant proportion of cases to come from borrowers in the small and medium-sized business segment, which was hit by Covid,” the report said, similar to what an S&P report said on Thursday.
“We strongly believe that Indian companies have limited vulnerability to exchange rates, so in general S&P states that large companies are largely unaffected,” said S&P’s Deepali Seth-Chhabria, explaining that smaller companies are relatively more vulnerable because they may not have the ability to fully pass on inflation and borrowing costs.
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