Efficacy of IBC in the Indian Financial Market

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Efficacy of IBC in the Indian Financial Market


The Insolvency and Bankruptcy Code (IBC) has been a much-discussed topic since its introduction in 2016.  Let me briefly touch upon the background of this law.

Banks in India have gone through unprecedented times with stressed assets portfolios touching an all-time high and very rightly the Reserve Bank of India (RBI) apprehended that there could be further significant additions as many stressed loans were disguised as ‘standard’, mostly by ever-greening. The government had attempted to force banks to clean up their balance sheets and came out with many regulatory steps aimed at improving their ability to deal with the stressed scenario.  However, RBI’s attempts failed to yield the desired effects.

In order to alleviate this difficulty, the government of India had introduced IBC in 2016, which would consolidate the existing framework and create a new institutional structure.  The code envisaged time bound processes for insolvency resolutions of companies and individuals, which thereby would help India improve its World Bank insolvency ranking and the country rating as well.

The key objectives of the IBC 2016 are:
•    To encourage entrepreneurship.
•    To make credit available.
•    To balance the interests of all stakeholders by consolidating and amending the existing laws relating to insolvency and bankruptcy.
•    To reduce the time of resolution for maximising the value of assets.

While talking about the “Code”, we must focus on the fact that it brings a paradigm shift from “debtors in possession” to “creditors in control”.  The test of Insolvency moves from “erosion of net worth” to “payment default”.  The ultimate aim is to increase the confidence of lenders and investors in the debt market.
Against this backdrop, we need to fully appreciate the effectiveness of the resolution's progress.

Since the provisions of the Corporate Insolvency Resolution Process (CIRP) came into effect on December 1, 2016, a total of 4,376 CIRPs have commenced till the end of March 2021.  (Source: IBBI’s latest Qtly Newsletter).

Out of the total, 2653 have been closed, including 348 CIRPs that ended in the approval of resolution plans.  617 CIRPs were closed on appeal or review or settled, whilst 411 were withdrawn and 1277 were ordered for liquidation. (Source: IBBI’s latest quarterly newsletter).

According to IBBI’s (Insolvency and Bankruptcy Board of India) chairperson M.S. Sahoo, “Fueled by a huge unsatisfied appetite for freedom of exit, the insolvency law is changing the way society perceives business failures as it becomes necessary”.  Although six amendments and dozens of subordinate legislations have kept the code relevant with the changing needs, a question could be raised if it has been able to remove the impediments in the implementation process.

The inordinate delay in the final resolution i.e. implementation of the code is truly beating the purpose of the same. On 23rd June 2021, RPG group Chairman, Harsh Goenka said NCLT should be the next institution to be cleansed by the government to prevent, “hard earned public money being stolen” as company promoters stash away money on one side and get 80-90% haircut from banks during the insolvency resolution process (case ref: Siva Industries, Videocon etc.).

There are many more examples and many company resolution processes are stuck in various court cases.

These examples of exceptionally low settlement amounts have raised many eyebrows and several questions could be asked as to why the lenders / creditors have accepted such incredibly low amounts for settlements.  It would be pertinent to point out that in the process of these very low settlement amounts many companies in the MSME sector have perforce had to close down, leaving thousands of employees jobless in these hard days of Covid-19.

Goenka has rightly raised a very valuable point as stated above.  Both the government of India and RBI should take a critical relook at the whole system and take appropriate measures expeditiously to fulfill the objectives of the law and foster strengthening of the financial sector.  

(The author is former member of the Board of Directors of Standard Chartered Bank Nepal Limited.)

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