Implementation of key recommendations of a parliamentary standing committee are crucial for the success of the Insolvency and Bankruptcy Code (IBC) which has been hit by delays and declining recovery rates just five years after its inception, rating agency Crisil said.

In August a 29 member standing committee headed by the former minister of state for finance Jayant Sinha, and also including former prime minister Manmohan Singh said that low recovery rates with haircuts as much as 95% and 71% of the cases pending beyond the 180 days timeframe envisaged by the law point towards a deviation from the original objective of the code.

The key recommendations of the committee include developing specialised National Company Law Tribunal (NCLT) benches to hear only IBC matters, establishing a professional code of conduct for a committee of creditors (CoC), strengthening the role of resolution professionals and 4) digitalising IBC platforms in order to make the resolution process faster and maximise the realisable value of assets.

Crisil said that while the IBC has tilted the power equation in favour of creditors from debtors and helped strengthen India’s insolvency resolution ecosystem, its performance against its twin objectives – maximisation of recovery and timebound resolution – has been a mixed bag.

“Only a few large cases have seen higher recovery. Excluding the top 15 cases (by resolution value) from the 396 resolved cases, the recovery rate halves to 18%. Average resolution time for the aforementioned resolved cases is 419 days compared with the stipulated maximum of 330 days. About 75% of outstanding cases have already been pending for more than 270 days,” the rating agency said.

Since the code came into force in November 2016, it has helped recover about Rs 2.5 lakh crore, or around one-third of the admitted financial claims from insolvent firms, but lower recovery rates and enlongated resolution timelines have a lot more room for improvement.

“Besides low recovery rate and longer timeframe, a key challenge is the high number of cases going to liquidation. As of June 30, 2021, nearly one-third of the 4,541 admitted cases had gone into liquidation, with a recovery rate estimated at merely 5%. That said, around three-fourths of these cases were either sick or defunct. With closure of these vintage cases, recovery rate as well as timelines are expected to improve,” said Nilesh Jain, director Crisil Ratings.