THE DETERRENCE EFFECT OF IBC:

15 A FORECAST-BASED ANALYSIS OF THE

CIRP AND THE LIQUIDATION PROCESS

Dr. Hiteshkumar Thakkar, Dr. Gaurang Rami & Pratik P. Sarmah

CONTENTS:
1. Background
2. Literature Review
3. Insolvency and Bankruptcy Code: Law and Economics Approach
3.1 Framework of IBC
3.2 Repeated Game Theory: IBC
3.3 Insolvency & Bankruptcy as an Industry/Enterprise
3.4 Economic analysis of Insolvency Law: Trade-off
4. Time Series Forecasting
4.1 Forecasting of Corporate Insolvency Resolution Process (CIRP)
4.2 Initiation of Corporate Insolvency Resolution Process
4.3 Commencement of Voluntary Liquidations
4.4 Registration and Cancellation of Registrations of Insolvency Professionals (IPs)
4.5 Insolvency Professional Agencies (IPAs)
5. Summary
6. References

1. BACKGROUND
The Insolvency and Bankruptcy Code was passed in 2016. It has been amended and updated
as and when regulatory arbitrage and leakages are observed. In the present IBC setup, the
Insolvency and Bankruptcy Board of India is a dynamic regulator which looks after all the present
and future required regulations regarding the dynamic changes in the insolvency proceedings. The
desired goal of IBC is to create ‘ease of doing business’ without compromising on the core
principles. It aims to create deterrence by imposing high costs to prospective debtors, so that,
there are behavioural changes among the stakeholders, dealing with insolvency and bankruptcy
cases. The IBC do not dictate the form of resolution or the outcomes but designs the process
leading to the resolution. New and specialised stakeholders dealing with insolvency and
bankruptcy process, for example, Insolvency Processionals (IPs) and the Insolvency Professional
Agencies (IPAs) have been created under the Code. The IPs take care of speedy and efficiently
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 223

disposal of Corporate Insolvency Resolution Process (CIRP) and liquidation matters as and when
arrived. The process focuses on creditors to decide on the resolution plan and IPs run the day to
day operations of the debtor as going concern from previous debtor-in-possession model.
This chapter primarily deals with sophisticated forecasting Auto Regressive Integrated
Moving Average (ARIMA) model in dealing with CIRP and Liquidation Process from the time
period 2017Q1 to 2019Q3 and it will forecast five quarters from 2019Q4 to 2020Q4 and other
variables such as, the number of corporate cases that will be accepted through a resolution plan or
the number of cases that will lead to liquidation. It will also forecast the number of cases that will
be initiated by financial creditors or operational creditors or corporate debtors. The forecasting of
dependent variables, such as, CIRP, Liquidation, financial creditors, operational creditors, IP and
IPAs, are varying on each quarter, so time as an independent variable from the period of 2017Q1
to 2019Q3 will provide the trend or pattern based on auto regression plus moving average plus
differentiate and integrate in first or second order for forecasting of the above mentioned variables
for the period of 2019Q4 to 2020Q4. Though, the time series forecasting model predict trend,
seasonality, cyclical and noise based on previous time as independent variable for the given
dependent variables, this study will forecast on trends or noise for the five quarters (around one
year). As there are eleven observations (quarters), which is short duration, so getting seasonality
or cyclical is neither feasible nor reliable in the present study.

2. LITERATURE REVIEW
IBC enactment has been believed to have led to the behavioural changes in the debtor,
creditor, appellant authority, insolvency professionals in the form new incentives versus
disincentives in dealing with the issues of insolvency and bankruptcy. This behaviour change in
the economic agents needs to be monitored by IBBI.1 Similarly, IBC should protect the interest of
all involved agents in the debt contracts, which include both financial creditors and operational
creditors. The aim of IBC is to offer a coherent CIRP and Liquidation Process.2
The efficacy of Lok Adalats, Debt Recovery Tribunals (‘DRTs’), Securitisation and
Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002
(‘SARFAESI Act’) as Debt Recovery Tools were measured through various studies and have
concluded that the amount involved is significantly higher than amount recovered through these
debt recovery framework. Similarly, the number of cases referred to in this framework has been
significantly increasing. Therefore, there is significant inflow of debt recovery matter and
insignificant outflow of the on-going debt recovery matter. As a result, there is a continuous pile
up in the number of cases. This acts as a deterrence to the creditors as with the passing of each
day, new costs are added to the recovery process. The SARFAESI Act perceived to be severe law
as the banks had been provided with the power of adjudicating authority on matter of enforcement
of security without any court intervention. Despite of SARFAESI Act stringency, the NPAs
values have significantly increased in the post-SARFAESI period.3 Therefore, loan agreements

1 Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, Watching India’s Insolvency Reforms: A New Dataset of
Insolvency Cases (IGIDR, WP-2017-012, 2017).
2 R Sengupta, A. Sharma & S. Thomas, Evolution of the Insolvency Framework for Non-financial Firms in India (Indira
Gandhi Institute of Development Research, WP-2016-018, 2016).
3 Thakkar, H., Rami, G. & Sarmah, P.P., Efficacy of Debt Recovery Legislations: An Indian Experience, 62 Artha Vijnana,
1 (2020).
224 NPA Legislations in India: Law and Finance Series

need to be drafted and interpreted in such way that non-cooperative outcome can be transformed
into a cooperative outcome.4
In US, the Bankruptcy Reform Act of 1978, effective from October 1, 1979, significantly
increased the non-business bankruptcies and bankruptcies rate per adults. A study had evaluated
the impact of 1978 Act based on quarterly data of 1960:3 to 1995:4, the ARIMA model estimated
pre-intervention data for 1960:3 to 1995:4. The intervention model estimated that the 1978 Act
increased consumer bankruptcies in the US.5 Moreover, the ARIMA model relies on the past
values of the series as well as previous error term for the prediction. However, ARIMA models
are relatively more robust and efficient than more structural model in the subject matter of short-
run forecasting.6 The present study relies on IBBI data on CIRP and Liquidation process since
2017. The input data in this study were quarterly data of CIRP and Liquidation process. The time
series have random walk pattern and very randomly with no global trend or seasonality pattern
observed.7

3. INSOLVENCY AND BANKRUPTCY CODE: LAW AND ECONOMICS APPROACH

3.1. Framework of IBC

In Chart 1, the framework of IBC has been explained. The process evolved in the IBC is very
systematic and scientific. At first, the default takes place. After that, there is filing of application
to NCLT by the creditors (Financial Creditors, Operational Creditors or Corporate Entity). After
the admission of application, the moratorium period commences. Adjudicating authority appoints
of Interim Resolution Professional (IRP). IRP goes with public announcement, and also
constitutes the Committee of Creditors (CoC). In the first meeting of CoC, IRP may be appointed
as Resolution Professional (RP) or any other may be appointed as RP. The RP prepare the
information memorandum and invite EoI from the Resolution Applicants. Based on prepare
resolution plans by RP, CoC’s approval the resolutions plan as per 66 percentage voting and put
forth approval of Adjudicating Authority.

4 Thakkar et al., Interrelationship between Non-Performing Assets (NPAs) and the Debt Recovery Tools in India, 22
Think India Journal (Special Issue: Indian Economic Association) 83 (2019).
5 J.P. Nelson, Consumer bankruptcies and the Bankruptcy Reform Act: a time-series intervention analysis, 1960–1997,
17(2) Journal of Financial Services Research 181 (2000).
6 A.A. Adebiyi, A.O. Adewumi, & C.K. Ayo, Comparison of ARIMA and Artificial Neural Networks Models for Stock
Price Prediction, Journal of Applied Mathematics (2014).
7 Id.
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 225

Chart 1: Framework of IBC

3.2. Repeated Game Theory: IBC

The credit market is backbone of financial system and it provide access to credit to the
debtor. Loan is agreement between the creditor and the debtor, where the debtor honours loan
agreement and pays agreed amount (principal plus interest). Mostly, the debtor honours the loan
agreement and pays agreed installment in the specified time interval. When debtors and creditors
are in a repeated relationship, both sides want to abide by terms and conditions of the loan
agreement (contract). It is called cooperative outcome as mandated in the loan agreement.
Whereas in the phenomenon of unexpected breach of loan agreement or not paying dues of goods
and services may lead to non-cooperative outcome. The creditors put efforts through repeated
reminders and notices to settle their dues. After exploring all possible mechanisms, if dues are not
settled, the creditors (Financial Creditors and Operational Creditors) will use the forum of
Corporate Insolvency Resolution Process (CIRP) under IBC 2016 and transforming non-
cooperative outcome into a cooperative outcome. Therefore, the CIRP provide forum to the
creditors (Financial Creditors and Operational Creditors) to recover their dues as described in the
Chart 2.
226 NPA Legislations in India: Law and Finance Series

Cooperative
Outcome
Honour Loan
Agreement

Financial Creditors/ Loan/

supply
Operational of goods Debtor
Creditors/Corporate and
Debtors services Breach Loan Non-Cooperative
Agreement
Outcome

Chart 2: Simple Game Theory: Breach of Loan Agreement

IBC 2016 has rescued ventilated companies through resolution process and the Code tried to
avoid liquidation till treatment (resolution) possible. Through the Code, it has been envisaged that
the previous debtor-in-possession principle is replaced with the creditor-in-control principle. This
is done to impose costs on the debtors so that default is seen as a high-cost event. The
management is handed over to an IP whose work is overlooked by the CoC. Through this change,
it is predicted that a behavioural change shall be observed in the stakeholders of the insolvency
process. It can, therefore, be assumed that the enactment of IBC is seen as a step towards
changing the non-cooperative game into a cooperative game wherein the debtor shall try to repay
the loans on a timely manner and shall not try to appropriate it. This is because the Code tries to
remove the control of the debtor over the corporate body and in some cases; the corporate body
may even go into liquidation. As the time-period for resolution to be completed has already been
specified, there are fewer chances that the debtor may seek time to prolong it and impose time-
costs upon the creditor to weaken its bargaining power. In all, these changes are seen as strict
measures with tremendous costs to the debtor for non-cooperation.
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 227

Chart 3: Repeated Game Theory: High Cost

As per Simple Game Theory, if default takes place, there can either be high cost of default or
low cost of default. Chart 3 describes the high cost to debtor if default takes place, in which there
will be deterrence to all prospective defaulters in the initial round and future rounds. Moreover, if
matter of go to NCLAT or the Supreme Court, true intent of legislation prevails and if the same
phenomena repeated over period of time will lead to change in behaviour pattern of prospective
and ongoing defaulters, thereby ultimately reducing the number of defaults.

Chart 4: Repeated Game Theory: Low Cost

Whereas, Chart 4 describes the situation of low cost to debtor if default takes place, in such
scenario, these may incentivise all prospective defaulters in initial round. In repeated game theory,
these incentivise other debtors to default and there are more chances of defaults to take place. If
the matter goes to the highest court, broader interpretation and delay in decision may ultimately
leads to more defaults in the future.
228 NPA Legislations in India: Law and Finance Series

3.3 Insolvency & Bankruptcy as an Industry/Enterprise

Inputs of IBC as enterprise are defaults/liquidity problems which result into either resolution
or revival as detailed in the Chart 5 from default to approval of resolution plan. If CoC reject
resolution plan and opt for the liquidation or time period lapse of 180 days and one-time
extension of 90 days or matter with court in the total 330 days lapse may result to liquidation.
Ultimately leads to dissolution of the corporate entity.

Chart 5: Insolvency and Bankruptcy as an Industry/Enterprise

3.4. Economic Analysis of Insolvency Law: Trade-off

IBC is prepared based on rights and obligations of various trade-offs prevailing in the
insolvency matter. The debtor and creditor were aware about their opportunity cost and sunk cost.
Based on the cost and benefit analysis, the stakeholder makes their financial decision. The Chart 6
explained various trade-offs of in the insolvency matter.

Chart 6: IBC: Trade-off

The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 229

4. TIME SERIES FORECASTING

4.1. Forecasting of Corporate Insolvency Resolution Process (CIRP)

The variables of the CIRPs at the end of the Quarter, Admitted, Appeal/Review/Settled,
Withdrawal under Section 12A, Approval of Resolution Plan, and Commencement of Liquidation
descriptive Figure 1 has been as follow. The following figure describe that the CIRP at the end of
the quarter and commencement of liquidation has positive trend with time. Whereas, the variables
Admitted, Appeal/Review/Settled, Withdrawal under Section 12A and Approval of Resolution
Plan random walk pattern and without observing any specific trend or pattern.

Fig. 1: Corporate Insolvency Resolution Process

To have a better and appropriate forecasting value of various components of Corporate

Insolvency Resolution Process (CIRP); time series analysis with sophisticated forecasting model
like ARIMA has been applied. Among different ARIMA models, the following model is found to
be the most suitable for forecasting value of various components of CIRP (for both, in-sample and
out-of-sample).
230 NPA Legislations in India: Law and Finance Series

Table 1: Actual and Predicted Value of Components of Corporate Insolvency Resolution Process (CIRP)
with Model Summary (Number)

Closure by
Predicted Value of CIRPs at the beginning of the Quarter

Predicted value of CIRPs at the end of the Quarter

Predicted value of Withdrawal under Section 12 A

Predicted value of Commencement of Liquidation

Predicted vale of Approval of Resolution Plan
CIRPs at the beginning of the Quarter

Predicted Value of Appeal/Review/Settled

CIRPs at the end of the Quarter

Predicted Value of Admitted

Commencement of Liquidation
Withdrawal under Section 12A

Approval of Resolution Plan

Appeal/Review/Settled
Admitted
Quarter

2017Q1 - - 37 83.3 1 - - - - - - - 36 -

2017Q2 36 29 129 106.4 8 1.00 - - - - - - 157 182.1

2017Q3 157 163 233 136.35 18 8.00 - - 2 3.97 8 13.09 362 303.1

2017Q4 362 294 147 173.64 38 18.00 - - 7 6.67 24 33.52 440 508.1

2018Q1 440 440 195 198.7 20 38.00 - - 11 9.81 59 48.37 545 586.1

2018Q2 545 572 246 226.03 20 14.84 1 7.06 14 13.13 52 75.53 704 691.1

2018Q3 704 699 243 255.71 30 12.62 27 16.95 29 16.39 87 79.61 774 850.1

2018Q4 774 833 275 282.15 8 15.25 36 33.46 17 21.95 82 99.02 906 920.1

2019Q1 906 954 374 309.14 20 21.28 19 16.72 22 24.06 86 101.85 1133 1052.1

2019Q2 1133 1077 294 343.28 14 20.00 19 7.94 27 26.74 93 98.81 1274 1279.1

2019Q3 1274 1220 369 366.09 9 6.62 14 19.55 27 29.87 96 97.46 1497 1420.1

Out-Of-Sample Forecasting

2019Q4 1363 394.08 25.23 34.5 32.39 97.27 1643.1

2020Q1 1496 421.78 16.38 17.5 35.47 97.66 1789.2

2020Q2 1628 449.48 20.80 8.5 38.56 98.05 1935.3

2020Q3 1761 477.18 24.49 19 41.64 98.44 2081.4

2020Q4 1893 504.88 12.52 34.5 44.72 98.83 2227.5

The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 231

Model Summary
8
Mode Holt Holt ARIMA Simple Holt Holt ARIMA
Type (0,1,0) Seasonal9 (0,1,0)10
(1,0,0)

R-squared 0.988 0.804 -.525 0.569 0.726 0.825 0.982

MAPE 6.979 23.181 53.567 126.721 23.757 24.66 8.117

MaxAPE 19.595 125.13 90.569 606.19 98.457 63.564 16.271

MAE 32.934 32.07 9.444 6.257 3.013 10.699 45.92

MaxAE 67.897 96.655 5.201 11.055 12.615 23.535 80.9

Q1: Jan – Mar, Q2: Apr - Jun, Q3: July - Sept, and Q4: Oct – Dec.
CIRPs at the Beginning of the Quarter

8 Holt: This model is appropriate for a series in which there is a linear trend and no seasonality. Its relevant smoothing
parameters are level and trend, and, in this model, they are not constrained by each other’s values. Holt’s model is more
general than Brown’s model but may take longer to compute estimates for large series. Holt’s exponential smoothing is
most similar to an ARIMA with zero orders of auto-regression, two orders of differencing, and two orders of moving
average.
9 Simple Seasonal: This model is appropriate for a series in which there is no trend and a seasonal effect that is constant
over time. Its relevant smoothing parameters are level and season. Seasonal exponential smoothing is most similar to an
ARIMA with zero orders of autoregression; one order of differencing; one order of seasonal differencing; and orders
1, p, and p+1 of moving average, where p is the number of periods in a seasonal interval. For monthly data, p = 12.

10 ARIMA(0,1,0) = random walk: If the series Y is not stationary, the simplest possible model for it is a random walk
model, which can be considered as a limiting case of an AR(1) model in which the auto-regressive coefficient is equal to
1, i.e., a series with infinitely slow mean reversion. The prediction equation for this model can be written as:
Ŷt - Yt-1 = μ or equivalently, Ŷt = μ + Yt-1
...where the constant term is the average period-to-period change (i.e., the long-term drift) in Y. This model could be
fitted as a no-intercept regression model in which the first difference of Y is the dependent variable. Since it includes
(only) a non-seasonal difference and a constant term, it is classified as an “ARIMA(0,1,0) model with constant.” The
random-walk-without-drift model would be an ARIMA(0,1,0) model without a constant.
232 NPA Legislations in India: Law and Finance Series

Admitted

Withdrawal under Section 12A

The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 233

Approval of Resolution Plan

CIRPs at the End of the Quarter

234 NPA Legislations in India: Law and Finance Series

Commencement of Liquidation

Appeal/ Review/Settled

Fig. 2: Actual and Predicted Value of Components of Corporate Insolvency Resolution Process (CIRP)

From the model summary table and figure, the positive leaner trend for observed and
predicated in the CIRP at the beginning quarter, CIRP at the end of the quarter and
commencement of liquidation, the model explains 98 per cent, 98 per cent and 82 per cent
variation respectively based on its R-squared value. There is very small value Mean Absolute per
cent Error (MAPE) and Maximal percentage error (MAXPE) respectively. Whereas, for Admitted
and Approval of Resolution Plan variables also observed and predicated positive trend with R-
squared value (model explain overall variation) 80 per cent and 72 respectively with high value of
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 235

MAPE and MAXPE. However, withdrawal under Section 12A and Appeal/Review/Settled reflect
the mixture of negative and positive trend and it does reflect the seasonal pattern and trend with
56 and R-squared value respectively and very high value of MAPE and MAXPE.
From the above data, it is clear that there is positive trend of CIRP at the beginning quarter
and CIRP at the end of the quarter. It does reflect that inflow cases increase, so the question arises
that whether CIRP fulfil its goals of creating deterrent effect on the prospective insolvent. Over
and above, the increasing trend of commencement of liquidation does reflect CIRP initiation leads
to liquidation which may not good signal for the overall macroeconomics.11

4.2. Initiation of Corporate Insolvency Resolution Process

The following descriptive figure describes the CIRP initiation by Operational Creditor,
Financial Creditor and Corporate Debtor. The variable operational creditors and financial
creditors are majorly initiating CIRP process with minor random ups and down. In long run, there
is a positive trend visible in both the variables. Whereas, the Corporate Debtor initiation of CIRP
diminishing with over period of quarters.

Fig. 3: Initiation of Corporate Insolvency Resolution Process: FC, OC & CD

11 Thakkar, et al., ‘Forecasting of Corporate Insolvency Resolution Process (CIRP) and Liquidation Process in the
Insolvency and Bankruptcy Code (IBC) Regime in India’ in the ‘National Conference on Law & Economics’ at The
National Law Institute University, Bhopal (03-04 February 2020).
236 NPA Legislations in India: Law and Finance Series

Table 2: Actual and Predicted Value: Initiation of Corporate Insolvency Resolution Process by FC, OC & CD

No. of CIRPs Initiated by

Predicted Value of Total

Operational Creditor

Operational Creditor
Predicted Value of

Predicted Value of

Predicted Value of
Financial Creditor

Financial Creditor

Corporate Debtor

Corporate Debtor
Quarter

Total
2017Q1 7 30.54 8 32.97 22 22 37 83.3
2017Q2 58 42.71 37 27.61 34 34 129 106.4
2017Q3 100 59.5 94 63.95 39 40.53 233 136.35
2017Q4 67 79.31 66 55.05 14 14.38 147 173.64
2018Q1 89 92.81 84 91.14 22 14.26 195 198.7
2018Q2 129 107.33 99 85.8 18 23.3 246 226.03
2018Q3 132 124.89 95 122.15 16 25.64 243 255.71
2018Q4 153 140.71 106 113.2 16 8.25 275 282.15
2019Q1 166 157.15 187 149.27 21 13.71 374 309.14
2019Q2 154 173.18 127 143.97 13 12.33 294 343.28
2019Q3 177 185.86 183 180.29 9 12.13 369 366.09
Out-Of-Sample Forecasting
2019Q4 199.78 171.37 11.87 394.08
2020Q1 214.75 207.44 14.88 421.78
2020Q2 229.72 202.11 8.68 449.48
2020Q3 244.7 238.44 5.74 477.18
2020Q4 259.67 229.52 7.14 504.88
Model Summary
Mode Winters’ Winters’
Holt Holt
Type Additive Multiplicative
R-squared .864 .847 .620 .804
MAPE 43.535 43.474 23.144 23.181
MaxAPE 336.354 312.069 60.254 125.130
MAE 15.765 17.040 3.948 32.070
MaxAE 40.495 37.731 9.641 96.655
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 237

No. of CIRPs Initiated by Corporate Debtor

No. of CIRPs Initiated by Financial Creditor

No. of CIRPs Initiated by Corporate

Total No. of CIRPs Initiated

238 NPA Legislations in India: Law and Finance Series

Fig. 4: Actual and Predicted Value: Initiation of Corporate Insolvency Resolution Process by FC, OC & CD

From the model summary table and figure, the positive trend for observed and predicated of
the Number of CIRPs initiated by Operational Creditor and Financial Creditor, the model explains
86 per cent and 84 per cent variation respectively based on its R-squared value. There is moderate
value MAPE and MAXPE respectively. Whereas, number of CIRPs initiated by Corporate Debtor
observed and predicated positive and negative trend with R-squared value (model explain overall
variation) 62 per cent with moderate value of MAPE and MAXPE.
From the above data, it is clear that there will increasing CIRPs initiation by both
Operational Creditors and Financial Creditors and decreasing CIRPs initiation by Corporate
Debtors. Consequently, the total CIRPs initiation has an increasing trend. It does question the
overall deterrent IBC mechanism. If the current CIRPs process is based on stringent creditor-in-
control principles, then number of initiations by Financial Creditors and Operational Creditors
should be reduce in future. The prospective insolvent must have understood the repercussions.
But on the other hand, the consequences and cost of insolvency is not significant. It has not
achieved desired results.
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 239

4.3. Commencement of Voluntary Liquidations

Fig. 5: Actual and Predicted Value of Commencement of Voluntary Liquidations

Table 3: Actual and Predicted Value of Commencement of Voluntary Liquidations

Liquidations at end

Liquidations at end
Predicted Value of

Predicted Value of

Predicted Value of
Liquidations at the

Reports Submitted
Liquidations at

Value of Final
the beginning

Final Reports
Commenced

Commenced
Liquidation

Liquidation

Submitted
beginning

Predicted
Quarter

2017Q2 — — 13 25.87 - - 13 18.98

2017Q3 13 16.78 38 28.73 - - 51 55.76
2017Q4 51 55.15 56 33.68 4 4.89 103 92.79
2018Q1 103 93.45 66 68.95 6 8.72 163 132.89
2018Q2 163 134.5 41 40.89 21 6.68 183 177.07
2018Q3 183 179.35 55 46.24 2 6.5 236 216.29
2018Q4 236 219.22 31 51.09 29 25.62 238 258.33
2019Q1 238 261.72 83 78.24 35 30.28 286 292.17
2019Q2 286 296.09 69 51.65 17 29.71 338 328.91
2019Q3 338 333.2 46 60.31 30 24.21 354 368.78
Out-Of-Sample Forecasting
2019Q4 373.29 60.73 45.35 403.76
2020Q1 412.43 91.73 49.35 441.76
2020Q2 451.56 64.23 47.85 479.77
2020Q3 490.69 69.57 44.85 517.78
2020Q4 529.82 72.73 64.85 555.78
Model Summary
Mode Winters’ Winters’
Type Holt Additive Additive Holt
240 NPA Legislations in India: Law and Finance Series

R-squared .979 .527 .601 .981

MAPE 9.778 31.068 60.018 11.289
MaxAPE 29.086 98.975 225.093 46.014
MAE 11.669 11.279 6.130 12.708
MaxAE 28.499 22.324 14.317 30.110

Liquidations at the Beginning

Liquidation Commenced
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 241

Final Reports Submitted

Liquidations at End

Fig. 6: Actual and Predicted Value of Commencement of Voluntary Liquidations

From the model summary table and figure, the positive trend for observed and predicted of
the number of cases in liquidation at the beginning and number of cases in liquidation at the end
where model explain 97 per cent and 98 per cent variation respectively based on its R-squared
value. There is moderate value MAPE and MAXPE respectively. Whereas, number of cases of
liquidation commenced and liquidation final reports submitted observed and predicted seasonal
242 NPA Legislations in India: Law and Finance Series

trend (combination of positive and negative trend) with R-squared value (model explain overall
variation) 51 per cent and 60 per cent respectively with small value of MAPE and MAXPE.
From the above, data it is clear that there is an increasing trend of liquidation at the
beginning and liquidation at end. Whereas, the number of cases where liquidation commenced
and final reports submitted with seasonal trend, which may be due to the process of liquidation
taking different time period for different corporates.

4.4. Registration and Cancellation of Registrations of Insolvency Professionals (IPs)

Fig. 7: Registration and Cancellation of Registrations of IPs

Table 4: Actual and Predicted Value of Registration and Cancellation of Registrations of IPs

Predicted Predicted Registered at the Predicted Value of

Quarter Registered Value of Cancelled Value of End of the Registered at the End
Registered Cancelled Quarter of the Quarter

2017Q1 96 — 0 0 96 126.3

2017Q3 450 96 0 0 546 610.94

2017Q4 561 252 0 0 1107 1035.81

2018Q1 217 369 0 0 1324 1585.11

2018Q2 488 372 0 0 1812 1778.26

2018Q3 71 365 1 0 1882 2168.62

2018Q4 154 337 1 1 2035 2194.69

2019Q1 253 259 1 1 2287 2201.1

2019Q2 170 239 1 1 2456 2406.46

2019Q3 203 230 0 1 2663 2619.73

2019Q3 128 215 0 0 2791 2855.21

The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 243

Out-Of-Sample Forecasting

2019Q4 198 0 2987.64

2020Q1 186 0 3158.62
2020Q2 188 0 3329.59
2020Q3 188 0 3500.56
2020Q4 188 0 3671.53
Model Summary
ARIMA
Mode Type (1,1,1)
(0,0,0) Simple Holt
R-squared –.530 .214 .973

MAPE 88.506 25.000 9.477

MaxAPE 414.720 100.000 31.563

MAE 159.704 .182 104.591

MaxAE 354.000 1.000 286.622

Cancelled
244 NPA Legislations in India: Law and Finance Series

Registered at the End of the Quarter

Registered

Fig. 8: Actual and Predicted Value of Registration and Cancellation of Registrations of IPs

From the model summary table and figure, the constant trend for observed and predicted of
the registered and cancelled IPs where model explain 53 per cent and 21 per cent variation
respectively based on its R-squared value. There is high value MAPE and MAXPE respectively.
The result does reflect noise, which is not easily identified and predicted. Whereas, number of IPs
registered at the end of the quarter observed and predicted positive trend with R-squared value
(model explain overall variation) 97 per cent with moderate value of MAPE and MAXPE. Based
on positive trend of CIRP initiation and Liquidation initiation, the registered IPs may require
The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 245

positive trend but result is constant trend, which increases the burden on existing IPs with more
cases.

4.5 Insolvency Professional Agencies (IPAs)

Fig. 9: IPAs

Table 5: Actual and Predicted Value of IPAs

Predicted Predicted Value of

Predicted Value At the End of
Quarter Recognised Value of Derecognised At the End of the
of Derecognised the Quarter
Recognised Quarter
2017Q1 3 3.48 0 0 3 2.31
2017Q3 14 3.02 0 0 17 18.4
2017Q4 22 13.54 1 0 38 31.35
2018Q1 18 21.64 0 0 56 57.53
2018Q2 19 18.15 0 0 75 74.97
2018Q3 1 18.96 3 0 73 93.84
2018Q4 4 1.76 4 0 73 75.16
2019Q1 3 3.91 20 20 56 71.35
2019Q2 5 3.04 13 13 48 41.84
2019Q3 6 4.92 0 0 54 37.24
2019Q3 7 5.95 0 0 61 57.27
Out-Of-Sample Forecasting

2019Q4 6.96 0 68.93

2020Q1 6.96 0 77.23
2020Q2 6.96 0 85.52
246 NPA Legislations in India: Law and Finance Series

2020Q3 6.96 0 93.82

2020Q4 6.96 0 102.12
Model Summary
Mode
Simple ARIMA(0,0,0) Holt
Type
R-squared 0.41 .941 .802

MAPE 192.037 60.000 14.595

MaxAPE 1796.431 100.000 31.030

MAE 4.510 .727 6.846

MaxAE 17.964 4.000 20.841

Derecognised

At the End of the Quarter

The Deterrence Effect of IBC: A Forecast-Based Analysis of the CIRP and the Liquidation Process 247

Recognised

Fig. 10: Actual and Predicted Value of IPAs

From the model summary table and figure, the constant trend for observed and predicted of
the recognised and derecognised IPAs where model explain 41 per cent and 94 per cent variation
respectively based on its R-squared value. There is high value MAPE and MAXPE respectively.
The result does reflect noise, which is not easily identified and predicted. Whereas, number of
IPAs registered at the end of the quarter observed and predicated positive trend with R-squared
value (model explain overall variation) 80 per cent with moderate value of MAPE and MAXPE.
Based on positive trend of CIRP initiation and Liquidation initiation, the register IPAs may
require positive trend but result is a constant trend, which increases the burden on existing IPAs
with more cases.

5. SUMMARY
The intent of Code was to create a deterrent effect to the prospective defaulters through the
stringent enforcement mechanism. However, the forecasting trend and pattern with regards to
CIRPs and Liquidation Initiation at beginning and end of the quarters show positive trends. It
means that there are possibly higher cases of CIRPs and Liquidation in the upcoming quarters.
Moreover, this positive trend of CIRPs and Liquidation should be synchronised with positive
trends IPs and IPAs as a facilitator. But there is a constant trend and pattern observed for the IPs
and IPAs. Therefore, there is a possibility that the IPs may have to deal with more cases of CIRPs
and Liquidations, which may dilute the objective of speedy disposal of insolvency matters. Also,
the CIRPs initiated by Financial Creditors and Operational Creditors show positive trends in the
upcoming quarters. There is no doubt the present insolvency mechanism is creditor centric.
However, the recent change in threshold limit of 1 lakh default change 1 crores may possibly have
moderate effect on the number cases initiated by the Financial Creditors and Operational
Creditors. The CIRPs initiated by Corporate Debtors show stepwise downward trends, which may
248 NPA Legislations in India: Law and Finance Series

be due to either high cost involved with regards to willful default or exit is not as free as
described in the perfect competition.
It can, therefore, be said that the deterrent effect of IBC, as was envisaged, may not have
translated into the practical world. There can be no doubt that it has helped in ease of doing
business but its impact on nipping the NPA problem at the bud is still questionable. The trend
shows that the IBC has rather created a swift way for the business to get out rather than make an
effort to save it and repay the debt on time. This raises the need to understand the behavioural
pattern of the promoters regarding moving out of business and making efforts to stay alive in
business. This shall help to better frame a policy based on the behavioural aspects of the
stakeholders.

6. REFERENCES
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networks models for stock price prediction, Journal of Applied Mathematics (2014).
2. J. P. Nelson, Consumer bankruptcies and the Bankruptcy Reform Act: a time-series intervention
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3. R. Sengupta, A. Sharma & S. Thomas, Evolution of the insolvency framework for non-financial
firms in India (Indira Gandhi Institute of Development Research, WP-2016-018, 2016).
4. Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, Watching India’s insolvency reforms: A
new dataset of insolvency cases (IGIDR, WP-2017-012, 2017).
5. Thakkar, H., Rami, G. & Sarmah, P.P., Efficacy of Debt Recovery Legislations: An Indian
Experience, 62 Artha Vijnana, 1 (2020).
6. Thakkar et al., ‘Forecasting of Corporate Insolvency Resolution Process (CIRP) and Liquidation
Process in the Insolvency and Bankruptcy Code (IBC) Regime in India’ in the ‘National
Conference on Law & Economics’ at The National Law Institute University, Bhopal (03-04
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7. Thakkar et al., Interrelationship between Non-Performing Assets (NPAs) and the Debt Recovery
Tools in India, 22 Think India Journal (Special Issue: Indian Economic Association) 83 (2019).

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