Insolvency And Bankruptcy Code Of 2016 A Game-Changer In Revitalizing The Country's Financial Distress Landscape

The advent of IBC aimed to beautify monetary discipline, restore debt settlement sanctity, deter defaulting debtors while revamping India’s marketplace mechanisms from ever greening of loans.

The Insolvency and Bankruptcy Code 2016 (“IBC”) is enacted in India to deal with problems related to insolvency and financial crisis. It gives a unified legal framework for resolving economic distress and selling monetary stability. To evaluate its performance, one needs to understand the history, development and why the legislation has been enacted by the Parliament.

The History and Evolution of IBC:

India had experienced a significant transformation after 1991 through policy measures like import liberalization and export incentives. The GDP of India was at 5.2% in 1990’s and in 2006, India performed a splendid GDP increase to 9.6%, positioning itself as the second one fastest growing foremost economy globally after China.

Despite the impact of LPG (Liberalisation, Privatisation and Globalisation) which include elevated exports and Foreign Investments, demanding situations like labour legal guidelines and economic deficits endured. A culture of crony capitalism pressured banks into indiscriminate lending practices ensuing in mass defaults and NPA accumulation since the early 2000s economic boom period. The gross Non performing Asset (NPA) rate had also become alarming with 7.5% in Scheduled Commercial Banks and 9.3% in Public Sector Banks with a gross NPA amount of ₹11,515.63 billion.

India has time and again enacted legislations to control financial defaults in the banking sector. Policymakers have repeatedly introduced laws for the recovery of distressed assets, maximizing value, and reviving companies under various legislations like the Sick Industrial Companies Act (SICA) of 1985 and the winding up regime under Companies Act of 1956. However, these legislations had drawbacks in balancing assets between debtors and creditors. Furthermore, policymakers implemented RDDBFI and SARFAESI Acts for recovery actions by creditors. The recovery rate under these legislations drastically declined from ₹256 billion in 2014-15 to ₹131.79 billion in 2015-16, with the average time taken for recovery ranging from 2.7 years to 20 years.

These scenarios necessitated the implementation of IBC in September 2016 due to growing NPAs reaching essential levels inside both public quarter banks and company entities working underneath careworn conditions. The advent of IBC aimed to beautify monetary discipline, restore debt settlement sanctity, deter defaulting debtors while revamping India’s marketplace mechanisms from ever greening of loans.

IBC aims to consolidate the existing framework by way of streamlining the insolvency resolution technique for people not only limited to corporates, and partnerships it has also included individual insolvency and MSME’s. The code allows well timed identification of economic distress, enables green resolution mechanisms, and maximizes the value of distressed belongings.

Under the Code, a time-bound process 330 days is established for insolvency decision even as prioritizing creditor rights and ensuring speedy remedy to all the stakeholders. It focuses on maximizing asset price through either restructuring or liquidation. However, the Code has been having sparked considerable debate, hailed as a dynamic law yet perceived as challenging by stakeholders like promoters and operational creditors. Despite sporadic governmental interventions, such as permitting MSME promoters to bid for companies within specific parameters, operational creditors remain particularly impacted and warrant focused attention in future deliberations.

Impact of IBC 2016:

The implementation of IBC 2016 caused extended investor self-assurance within the market because of its transparent and predictable insolvency resolution system. This boost in investor believe in the long run contributed to attracting more investments into the economy.

As of December 2023, IBBI report on corporate insolvency shows that 7,325 cases were admitted for the CIRP process, only 1,899 cases are still going on. Further, 2,159 of the cases has been closed as Resolved/Appeal/Review/Settlement or though withdrawal under Section 12A of the code. This shows the seriousness with which Indian businesses view this law. Moreover in 2,376 cases the liquidation order has been passed and 891 cases where resolution plans approved indicating result-oriented approach and also maturing of the system to allow “ease of exit”.

On the claims front, while the admitted claims amount to ₹10.07 lakh crore, the report indicates that the recovery is about ₹3.21 lakh crore, which comes to 32%. However, when viewed from the angle of liquidation value, it is 169%, which once again indicates the issue of crony capitalism and indiscriminate lending without proper risk assessment coupled with deterioration of value and misuse of funds thereby lack of financial discipline in the country resulting in low liquidation values for these loans. Moreover, the admitted claims of ₹10.07 lakh crore mostly include heavy penalties & interest components.

In terms of impact of the law, it is important to highlight that as against a plethora of applications filed before the NCLT seeking to admit entities into CIRP only 7,325 applications have actually been admitted whereas 27,514 applications with underlying defaults totalling ₹9.74 lakh crore have been withdrawn before their admission. Thus when one sees the larger picture of amounts that have come back into the system thru pre-admission settlements, resolution, liquidation, etc., it’s a mammoth over ₹13 lakh crore plus that’s come back into the financial or business ecosystem, resulting in a significant multiplier effect.

Furthermore, IIM Ahmedabad conducted a study and found that the resolution process of financial and business distress of companies under the IBC regime is more efficient than previous legislations. The Study assesses companies which have undergone the resolution process and have completed three years post approval of their resolution plans. Some progressive and positive data points have emerged herein. The average sales of these companies increased by 76%, average employee expenses up by 50%, average total assets up by 50%, a 130% increase in capex, increase in liquidity by 80% and valuations of listed entities going up from Rs 2 lac Crores to Rs 6 lac crores. These figures demonstrate the stability of the economy, given the timeline-bound procedures and effective restructuring process, and highlight the sustainability of corporate entities as key successes of the Code.

Conclusion:

There is no doubt that it is a game-changer for the Indian economy. While there have been evolving challenges in the 8 year journey which include the weak position of operational creditors and misuse of the law by using some creditors; but at a broader level IBC has had a fine impact on the economic system of India and has inculcated financial discipline in Indian businesses. With endured efforts towards compliance with IBC guidelines and addressing existing demanding situations effectively, India is poised to look further boom and improvement in personal guarantors and cross border insolvency.

The evolution of IBC reflects a commitment in the direction of developing more obvious and green commercial enterprise surroundings in India. This law is paving the way for stakeholders to navigate thru insolvency lawsuits with more readability and effectiveness. As we move forward, it is crucial to construct upon the initial successes of IBC and at the same time addressing the shortcomings proactively. This can be achieved through collaboration between all stakeholders as part of our larger goal that India moves forward in the direction of economic prosperity fuelled via accountable monetary, business and banking practices.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.