Why India's bankruptcy regime needs to be fixed

The IBC has proved to be a deterrent for many unscrupulous borrowers. Photo: Mint
The IBC has proved to be a deterrent for many unscrupulous borrowers. Photo: Mint

Summary

Average days taken to resolve a case has risen to 679 days in H1FY23 from 230 days in FY18.

New Delhi: The government is proposing to make changes to India’s six-year-old Insolvency and Bankruptcy Code (IBC). Mint examines the relevance of the game-changing reform to the economy, and why the changes are necessary now.

What was the intent behind framing IBC?

The IBC, which was enacted in 2016, came at a time of mounting debt defaults. The intent was to overhaul the corporate distress resolution regime in the country. It focuses on resolving the insolvency of corporations, individuals and partnerships in a timely manner. It was introduced with the objective of simplifying insolvency and bankruptcy proceedings, protecting the interests of all stakeholders — the company, employees, debtors, and especially, creditors—and for timely revival of the company. The Insolvency and Bankruptcy Board of India is the regulatory body implementing the code.

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What are the changes being proposed?

Average days taken to resolve a case has risen to 679 days in H1FY23 from 230 days in FY18. The changes presently under consideration seek to address inter-creditor disputes, which have been identified as the leading cause of delays. The process is being proposed to be divided into two phases—phase I will focus on finding potential buyers and handing over the management to the acquirer. Phase II would address distribution of proceeds among creditors and settle inter-creditor disputes. The proposed steps would make an effort to revive the units with better management, wherever possible.

Dragging on
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Dragging on

What has been the progress in its objectives?

As of September, cases admitted under the corporate insolvency resolution process (CIRP) were 5,893. Of this, 3,946 were closed (553 had resolution plans) and 1,947 are ongoing. 2,531 were started by financial creditors, 3,008 by operational creditors and 350 by corporate debtors. 64% of the cases were over 270 days old while only 25% of the cases were resolved in 180 days.

What were some of the roadblocks?

Most cases overshot the timeframe as many affected promoters / corporations went to court and held up cases. Pending cases—such as Jaypee’s—are held up between the NCLT, NCLAT and the Supreme Court. They have overshot the resolution timeframe by miles. However, efforts have been made to make the IBC more efficient. Homebuyers, for instance, can now be considered as financial creditors. The onset of the pandemic did result in the government deferring the provisions of the IBC.

Why is the IBC seen as a game-changer?

The IBC has proved to be a deterrent for many unscrupulous borrowers and imparted tools to banks to be reasonably confident about recovering NPAs. Fear of losing control of the firm nudges debtors to settle their dues. Till September, 23,417 applications for initiation of CIRPs, with underlying default amount of 7.31 trillion, were resolved before admission. Indirectly, the code provides an exit route by winding up commercially unviable units.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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