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Home / Politics / Policy /  Why only 2 firms chose pre-pack insolvency resolution in a year

India introduced the pre-packaged insolvency resolution process (PPIRP) in April 2021, as an alternative resolution process for micro, small and medium enterprises (MSMEs). However, it has only two cases admitted under it so far. Mint explores the reasons.

What is the Insolvency and Bankruptcy Code?

The IBC was enacted in 2016 to simplify insolvency and bank-ruptcy proceedings, safeguard interests of all stakeholders (the firm, employees, debtors and especially creditors), and resolve non-performing assets. From a ‘debtor in possession’ regime, it was a shift to a ‘creditor in control’ one. IBC provides for a time-bound process for resolving insol-vencies. The Insolvency and Bankruptcy Board of India (IBBI) is the regulator implementing the code and overseeing the functioning of stakeholders. The IBBI last week allowed payment of performance-linked incentives to resolution professionals.

What are the distinct features of PPIRP?

On 4 April, 2021, the government issued an ordinance to allow the use of ‘pre-packs’ as an insolvency resolution mechanism for MSMEs. Unlike the corporate insolvency resolution process (CIRP), an informal understanding is reached with creditors before the appli-cation is filed. PPIRP begins only after 66% of financial creditors approve the proposal and the name of resolution professional. Debt resolution agreement between financial creditor and a potential investor is arrived at in consultation with the corporate debtor for which subsequent approval of the resolution plan is sought from the NCLT.

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What were the objectives behind introducing PPIRP?

MSMEs greatly contribute to the economy, and employ a wide section of the population. The pandemic severely impacted their operations. Keeping this in mind, the unique nature of their business, and a simpler corporate structure, an alternative insolvency resolution process was designed to ensure quicker, cost-effective and value-maximizing outcomes for all.

What is the progress in PPIRP so far?

Only two insolvency cases have been initiated under PPIRP since it was introduced: Delhi-based Loon Land Developers and Ahmedabad-based GCCL Infra-structure & Projects. The poor response has been attributed to the hesitancy on the part of financial institutions. In the case of CIRP, the haircut involved is a last resort, against a voluntary one in case of PPIRP. Data shows that between December 2016 and June 2022, a total of 5,636 CIRPs commenced, of which 3,637 have been closed.

Does PPIRP defeat the purpose of IBC?

The IBC’s objective is to facilitate exit from failed units so that capital can be reallocated to better ones. However, banks are not comfortable initiating PPIRP due to voluntary haircuts. There is a fear that such a decision might be scrutinized later. This means capital will remain locked up in failed units, defeating the purpose of IBC. Voluntary haircuts mean less resources from the winding-up process, and greater scope for corrupt practices.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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