As per the Reserve
Bank of India (RBI), India’s banking sector is sufficiently capitalized and
well – regulated. Credit, market and liquidity risk studies suggest that Indian
banks are generally resilient and have withstood the global downturn well. The
Indian economy is a mixed economy. It is known to be the world’s sixth largest
in terms of nominal GDP. The legal environment
plays a vital role in the economic development of a country.
After GST, IBC is
the second most crucial reform in the legal setting of India. It was
implemented through an act of Parliament. The law was necessitated due to huge
pile up of non-performing loans of banks and delay in debt resolution.
Insolvency resolution in India took 4.3 years on an average against other
countries such as U.K (1 year) and U.S.A (1.5 years), which is sought to be
reduced besides facilitating the resolution of big-ticket loan accounts. Two
years on the IBC has succeeded in a large measure in preventing corporates from
defaulting on their loans. The IBC process has changed the debtor-creditor
relationship. A number of major cases have been resolved in two years, while
some others are in advanced stages of resolution.
With a strict
180+90 days ‘resolve-or-liquidate’ diktat, the Code has received commendation,
not only from the Indian Industry, but from the global fraternity, including
The World Bank and IMF, and has materially contributed to India’s 30 place jump
in 2018’s Ease of Doing Business ranking. IBC truly enforces the
concept of ‘creditor in control’ instead of ‘debtor in possession’, and
maximize value recovery potential corporate debtors. “Capitalism
without Bankruptcy is like Catholicism without Hell," said Frank
Borman, renowned astronaut and erstwhile chairman of a failed US airline. As
such, the institutions established by the state should promote freedom to start
a business (entry), to run the business (level playing field) and to
exit/discontinue the business. The reforms of the 1990s focused on freedom of
entry (dismantling the license-quota raj) and then, from the beginning of this
century, the focus shifted to freedom of continuing business. The third leg,
which is freedom to exit, has now been provided in the shape of the IBC, to
provide a mechanism to stressed businesses to resolve insolvency in an orderly
manner.
The IBC seeks to
consolidate scattered and unstructured jurisprudence on insolvency prevalent in
various Acts, like the Presidency Towns Insolvency Act, 1909, Sick Industrial
Companies Act, 1985, Limited Liability Partnership Act, 2008, Companies Act,
2013, etc. On
the positive side, we have witnessed that debtors were reconciling with the ‘creditor
in control’ scenario, with the committee of creditors (CoC) becoming
all- powerful in the resolution process.
It was the first
time that the government and Reserve Bank of India were on the same page for
effective resolution of the problem of bad debt and improving overall financial
discipline in the way business is conducted in India. As Nelson Mandela said, “I
never lose; I either win or I learn." The jury is
still out on the IBC even though the World Bank has acknowledged the efforts.
WHAT
IS INSOLVENCY AND BANKRUPTCY CODE, 2016?
“In One line we can say that in case of a
default by the equity owners to meet their debt obligations, control is
transferred to the creditors and equity owners take a back seat.”
The insolvency and
Bankruptcy code, 2016 (IBC) is the bankruptcy law in India and whose aim is to
consolidate the existing framework by creating a single law for insolvency and
bankruptcy and amend the laws relating to the entities in India with the time
being enforce. The consolidation of laws in India is not a new concept like GST
was framed by consolidating 17 laws into one. This code was introduced in Lok
Sabha in December 2015. It was passes by Lok Sabha on 5 May 2016.
The purpose of
this act can be divided into the following two goals:
1. Making sure that the insolvency
proceedings can be completed within a minimum amount of time.
2. Making sure that the financial risks
to the foreign investors is decreased.
Its primary goal was to consolidate insolvency resolution process for LLPs.
Companies, individuals and partnerships.
That being said, the purposes of these
codes, being a part of The Companies (Amendment) Act 2017, are the following:
1. Establishing and amending the
laws associated with reorganizing and resolving the insolvency of entities like
partnership firms, individuals and corporate persons.
2. Providing resolution in a time
bound manner.
3. Promoting
entrepreneurship in India.
4. Maximizing
the availability of credit in the Indian market.
5. Establishing
Insolvency and Bankruptcy Board in India.
The four pillars
of supporting institutional infrastructure, to make the Insolvency and
Bankruptcy Process work efficiently are:
- The regulator – The Insolvency and Bankruptcy
Board of India (IBBI) - Adjudicating Authority (AA):
- National Company Law Tribunal (NCLT)
– For Corporate, i.e., Companies and Limited Liability Partnerships - National Company Law Appellate
Tribunal (NCLAT) will act as Appellate Authority. - Debt Recovery Tribunal (DRT) – For
Individuals and Unlimited Partnership Firms - A private industry of Insolvency Professionals
(IPs) with oversight by private Insolvency Professional Agencies (IPAs) - A private industry of Information Utilities (Ius)
THE ROUTE TO THE IBC
The main objective of the act is to consolidate and
amend the laws relating to reorganization and insolvency resolution of
corporate persons, partnership firms and individuals in a time bound manner for
maximization of value of assets of such persons, to promote entrepreneurship,
availability of credit and balance the interests of all the stakeholders
including alteration in the order of priority of payment of Government dues and
to establish an Insolvency and Bankruptcy Board of India, and for matters
connected therewith or incidental thereto.
IBC provides for a time-bound process to resolve
insolvency. When a default in repayment occurs, creditors gain control over
debtor’s assets and must make decisions to resolve insolvency. When a default
in repayment occurs, creditors gain control over debtor’s assets and must make
decisions to resolve insolvency. Under IBC, debtor and creditor both can start ‘recovery’
proceedings against each other.
It
is a comprehensive Code enacted as the Preamble states, to
“consolidate
and amend the laws relating to reorganization and insolvency resolution of
corporate persons, partnership firms and individuals in a time bound manner for
maximization of value of assets of such persons, to promote entrepreneurship,
availability of credit and balance the interests of all the stakeholders
including alteration in the order of priority of payment of Government dues and
to establish an Insolvency and Bankruptcy Board of India, and for matters
connected therewith or incidental thereto”.
The Preamble
clearly states that the legislative intent to incorporate this code is
Firstly,
to
remove the ambiguity that had been prevailing in the previous legislations;
Secondly,
to
prevent unnecessary delays and to ensure fast dismissal of matters, i.e.,
within 180 days;
Thirdly,
to
prevent loss to corporate creditors due to depreciation of assets of the
insolvent company;
Fourthly,
to
establish a balance among the interests of the various stakeholders, and
Lastly,
to
create a common forum to deal with such matters.
IMPACT
OF IBC
The Covid-19 pandemic has been driving corporate
failures around the world, including in India. The global financial news
reveals an increase in bankruptcies due to the Covid-19 induced global
lockdowns. While the bankruptcies are unfortunate, a recognition of the
bankruptcies facing companies in the face of the collapse and an efficient
resolution of such bankruptcies (which will allow both the companies and
creditors involved to move along) is vital to rejuvenating the economy.
In the light of the Covid-19 pandemic and
business failures globally, it is important that financially distressed
companies can still access the credit market thanks to a strong bankruptcy
system and survive under stressed scenarios. Using a panel of 33,845
non-financial firms for the period of 2008-19 and by exploiting a
difference-in-differences analysis, a study has been undertaken revealing the
impact of the IBC policy on the availability of long- and short-term financing
for, and the cost of, credit of distressed firms as compared to their
non-distressed counterparts. As in most emerging markets, India’s debt market
is dominated by state-owned banks and the domestic credit to private sector by
banks (percentage of GDP) is 50 per cent in 2019 compared to a world average of
90.5 per cent (Source: World Development Indicators). Recent statistics from
World Bank’s Doing Business Data show the creditor rights index in India improving
from 6 in 2014 to 9 in 2019 compared to the world average of 5.67 in 2019.
Bose et al. (2021) study shows that after the
introduction of the IBC reform, the access to long-term debt increased by 6.3
per cent, short-term debt increased by 1.4 per cent, while the cost of
borrowing declined for distressed firms. This is the first study that provides
evidence on the impact of the IBC policy on the “credit channels” of distressed
firms. The enactment of the code has helped to enforce discipline in the
country’s credit culture. IBC has created a credit culture that discourages
defaults. There has been a change in the business culture as well: there is now
an understanding that when things go wrong, companies will not get an automatic
rescue package from the taxpayer funds. The objective of IBC was to create
conditions so that credit could be generated from the domestic market and
investments drawn from the international market. In order to achieve those
objectives, it was necessary to create a culture of deterrence against
default. The practice of dragging lenders to court to delay the repayments
of outstanding loans is slowly coming to an end. India’s Insolvency and
Bankruptcy Code is ensuring that lenders get repaid on time and this is making India
a more attractive investment destination.
IBC has played a great role in macroeconomic
objectives providing India a strong stand in the global platform. After the
enactment of the code, the FDI has substantially increased. In 2012-13, the FDI
of India was 34298 US$ Million and just after enactment of the code it rose to
61463 US$ Million in 2017-18 which is growing by approximately 80%. There has
been an increase in Mergers and Acquisitions activity in the country. It also
led to the establishment of Information Utilities (IUs) which further accelerated
the development of the credit market of India.
In previous, no law prevented the operational
creditors but under the code, there is a provision that the operational
creditors (domestic as well as international) have right to file suit against
the default. Thus, the code provides right to the foreign creditors which will
enhance the economic transactions of India and others.
COVID
The global COVID-19 pandemic and its consequential
lockdown are having an economic ripple effect on the business of Indian
citizens. To mitigate its impact, in the last tranche of economic reforms, the
Central Government made numerous changes upon the Insolvency and Bankruptcy
Code, 2016 ("IBC"), and its adjudicatory processes, which will have
wide-ranging ramifications. In exercise of its powers under Section 4 of the
IBC, the Central Government has raised the threshold for invoking insolvency to
Rs 1 crore from the existing Rs 1 lakh. This provision will relegate MSMEs to
civil remedies for debt recovery and may have an effect of excluding it under
the IBC. At this cost, the amendment may have successfully addressed the issue
of frivolous recovery claims initiated under the grab of insolvency processes
due to the seemingly low original threshold of rupees one lakh.
The
government has come up with IBC 2020 to streamline the CIRP, protect last-mile
funding, and boost investment in financially distressed sectors. The changes put a threshold condition
for initiating CIRP by the financial creditors, who are allottees under a real
estate project. It also imports safeguards for successful bidders, the
corporate debtors, and its assets from the offenses of the former promoters or
management.
India took decades to implement
such an effective insolvency regime and improve its global ranking of doing
business. It promotes entrepreneurship and tries to balance the interest of the
various stakeholders.
CONCLUSION
Resolving insolvency in a strict time
bound manner is an important challenge for any country to maintain a healthy
and robust economic system. This study has made an attempt to understand and
analyze the impact of the IBC on the credit sector of the economy. The study
emphasizes the fact that IBC is a big step in the direction of resolving the
issues of Non-Performing Assets and hence will act to the rescue of banks which
have been facing a lot of difficulties due to corporate defaults. The number of
companies that have benefitted from this law is large, there has been
improvement in the speed as well as the success rate of the resolution process.
There is still a long way to go ahead
and as the saying goes,
“We have to acknowledge the progress we
made, but understand that we still have a long way to go. That things are
better, but still not good enough.”
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