The IBC had been designed with great emphasis on allowing a time-bound manner of resolution, which has not been possible in most of the cases due to limited NCLT benches as well as disputes raised by either dissenting creditors or the existing promoters in the higher courts

Two of the ground-breaking reforms in the last decade have arguably been the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 and the Goods and Services Tax (GST) in 2017. Both have matured appreciably since inception, although some ground remains to be covered going ahead. 

The IBC has evolved admirably since its introduction, offering a strong platform to improve the manner in which insolvency proceedings are handled in India. The Code has empowered both financial and operational creditors to force a debtor into insolvency and bankruptcy proceedings upon a missed payment, in a structured and effective manner. The creditors can take this route for a missed payment of even Rs. 1 crore, a modest threshold that confers a small-sized creditor with the same influence as a larger creditor. 

Operational creditors have been at the forefront of initiating corporate insolvency resolution processes (CIRPs) under IBC for defaulting debtors, contributing to more than 50% of the CIRPs initiated so far. Importantly, promoters have been proactive in resolving payment disputes with creditors, to avoid being dragged into IBC and end up losing control over their company, since the appointed resolution professional would then take charge. 

Further, even after admission under IBC by the National Company Law Tribunal (NCLT), a good proportion of debtors have chosen to resolve the proceedings by settling with the creditors or agreeing to settle in future, and thus withdrawing the application under Section 12A. Of the total CIRPs that have been closed under IBC till September 30, 2021, a substantial 17% were concluded by withdrawal under Section 12A. 

The Code has nonetheless suffered protracted delays in concluding the entire process, with bottlenecks cropping up from the time an application has to be decided upon by the NCLT. The IBC had been designed with great emphasis on allowing a time-bound manner of resolution, which has not been possible in most of the cases due to limited NCLT benches as well as disputes raised by either dissenting creditors or the existing promoters in the higher courts. 

As on September 30, 2021, a dismaying 73% of ongoing CIRPs had exceeded the initially-set 270 day-period within which a resolution should be completed (subsequently increased to 330 days vide an amendment). Such delays erode the value of the debtors' assets, enlarging the creditors' haircuts. All stakeholders should focus on meeting the IBC-specified timelines, to enhance the creditors' confidence in this process. 

The realisation of creditors' proceeds from the IBC has been a mixed bag: only 14% of the CIRPs that have closed, yielded a resolution plan that allowed the company to remain a going-concern. As many as 46% of the debtors undergoing CIRPs went into liquidation, forcing substantial haircuts on the creditors. The remaining cases were closed either under Section 12A or under appeal / review. 

Of the 421 CIRPs that have yielded a resolution plan, the financial creditors have realised a modest 36% of their total claims, although one-third of these entities were already under BIFR or defunct at the time of initiation of CIRP, where the recovery was anyway expected to be low. 

Admittedly, the Code is some steps away from achieving the desired results efficiently. In our view, the objective of the CIRP should be to keep the corporate debtor as a going concern, even if that necessitates a steep haircut, to save precious jobs and support the economy. This is especially important now, with the nascent growth recovery striving to attain durability. Moreover, haircuts can be minimised through innovative options such as the Swiss Challenge method, allowing for a fair discovery of the true value of the defaulting entity. 

Additionally, the recent introduction of the pre-packaged insolvency resolution process could permit a quicker and more efficient resolution of CIRPs for micro, small and medium enterprises (MSMEs), that have been disproportionately wounded by the pandemic.

Moving on to GST; many of the initial teething troubles related to the transition are now well behind us. Evasion has been whittled down after the introduction of the GST e-way bills. This has yielded handsome revenue augmentation, with collections expanding by 27% in November 2021 relative to November 2019, despite economic activity being only modestly higher than pre-Covid levels. 

Some niggling issues persist, such as inverted duty structures in sectors such as pharmaceuticals. Rate rationalization and simplification remain on the agenda, especially the large number of slabs within the GST structure. 

We remain cautious regarding the wisdom of undertaking large-scale rate rationalization at this stage, both in terms of the inflationary impact of raising rates, and the potential revenue loss upon lowering rates. In our view, SGST flows need to be protected at this stage, given the looming cessation of the GST compensation regime. 

Compensation was originally intended to be extended to the state governments for a transition period of five years, that ends on June 30, 2022. This is set to pose a structural challenge to those states, that have a large dependence on GST compensation compared to the size of their revenues, such as Punjab, Karnataka, Gujarat, Maharashtra etc. 

Our analysis suggests that on a cash flow basis, the fund transfer would roughly halve in FY2023, before evaporating in the following fiscal. The GST compensation requirement aggregated to Rs. 2.8 trillion in FY2021, and is estimated at Rs. 2.7 trillion in FY2022. The GoI recently revealed that Rs. 372 billion of compensation remains pending for FY2021. 

If the pending compensation for FY2021 is released in FY2023, in addition to the dues for Feb-March FY2022 and Q1 FY2023, such transfers would aggregate to an estimated Rs. 1.2-1.5 trillion. This would boost state cash flows in FY2023, affording them a somewhat softer landing after the compensation period ends.

As the GST Council meets over the next few months, protecting revenue visibility is sure to be at the forefront for many state finance ministers. Based on the learnings so far, the IBC needs further amendments to improve the efficiency and timeliness of concluding CIRPs. Accordingly, the role of the Government and the Insolvency and Bankruptcy Board remains paramount. 

Abhishek Dafria is Vice President and Group Head, Structured Finance, and Aditi Nayar is Chief Economist, ICRA Limited