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Thursday, September 23, 2021

Strengthen the Code

Outcomes under IBC have fallen short of expectations. The process needs to be streamlined.

By: Editorial |
Updated: July 28, 2021 8:10:49 am
The IBC has emerged as a credible threat against errant promoters, and a stringent mechanism to usher in credit discipline in the country.

Five years ago, the Insolvency and Bankruptcy Code (IBC) was passed by the Parliament, bringing about a structural change in the framework that governs the corporate insolvency resolution process in India. The IBC provides for a time-bound resolution of firms, addressing the vexed problem of firm exit in India. It has strengthened the hands of creditors in enforcing their rightful claims against corporate debtors. The threat of losing control over their company has emerged as a powerful deterrent for errant promoters not wanting to meet their financial obligations. It has also provided operational creditors — typically micro, small and medium enterprises — a powerful tool to negotiate the payment of dues with the larger firms. In fact, about half of the cases have been initiated by operational creditors. However, despite a considerable improvement over the erstwhile architecture, on various parameters, outcomes under the IBC have not been as favourable as envisaged.

Of the 4,376 cases that have been admitted into insolvency proceedings till March 2021, resolution plans have been approved in only 348 cases (7.9 per cent), while 1,277 (29 per cent) cases have ended in liquidation. In cases where a resolution plan has been accepted, the average time taken stands at 459 days, higher than the 330 limit. In these cases financial creditors have realised only 39.2 per cent of their admitted claims. There are several possible explanations for the outcomes not meeting expectations. For one, amid a slowing economy, uncertain future prospects may have reduced the number of interested buyers or depressed the bids for companies. It is also possible that in some cases assets may have been siphoned off, leaving very little value in the company. In cases that were carrying on under earlier regimes, the value of assets would have been significantly eroded. Further, delays in either beginning the insolvency proceedings or the resolution process itself — in many cases, promoters have repeatedly tried to mount legal hurdles causing considerable delay — would have led to significant value destruction.

The IBC has emerged as a credible threat against errant promoters, and a stringent mechanism to usher in credit discipline in the country. But the functioning of the Code needs to be streamlined and strengthened. Errant promoters should not be allowed to manipulate the system to their advantage. The timelines for resolution need to be strictly adhered to as speedy resolution was one of the most appealing aspects of IBC. The capacity of the system to handle cases also needs to be augmented as delays in the process destroy enterprise value.

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