Policymakers and analysts have been closely monitoring the efficacy of the Insolvency and Bankruptcy Code (IBC), which was enacted to enhance the country's credit culture and combat industrial illness. Insolvency and Bankruptcy Board of India (IBBI) Chairperson M.S. Sahoo remarked in an e-mail interview that only a small percentage of enterprises brought to tribunals under the IBC are liquidated.
India operationalised the IBC in 2016-17 when the economy grew at 8.2%. Is it time for a review?
IBC is evolving in the context of life, just like any other economic law. It has been quick to respond to changing market conditions and has made timely course corrections to stay on track. It has seen six major legislative initiatives in less than five years. The suspension of submitting petitions for the initiation of bankruptcy proceedings and the implementation of a pre-packaged insolvency resolution process for micro, small, and medium enterprises (MSMEs) are two recent examples of how the times have changed. The Insolvency Law Committee regularly examines the IBC's operations to identify issues that affect process efficiency and effectiveness and offers recommendations to fix them.
The IBC has improved India's ease of doing business ranking and reduced its time to resolve a bankruptcy. The increasing percentage of liquidation cases, on the other hand, is a source of concern. What went wrong, and what can we do to correct it?
If one only looks at the end game, when around 1,600 instances reach the finish line, that is, terminate with a resolution plan or liquidation, the allegation about a higher incidence of liquidation may appear correct. 19,000 instances, on the other hand, were closed before or after admission, but before they reached the finish line. When the full universe of enterprises that interact with IBC is evaluated, the fraction of bankrupt companies is minimal. What matters, in the end, is the value of saved strained assets. In terms of value, the cases accounting for 70% of the stressed assets were rescued, while the cases accounting for 30% of the stressed assets were liquidated.
Furthermore, three-quarters of the companies facing liquidation were already defunct, and one-third of the companies rescued was already defunct. This means that two-thirds of the enterprises that crossed the finish line were already defunct. When they joined the IBC, the companies that ended up in liquidation had assets worth about 6% of the claims against them on average. If a company has been sick for years, and the assets have depleted significantly, the market is unlikely to rescue it.
The code allows for reorganisation in two ways: first, through a resolution plan, and then, if that fails, through liquidation. The market makes the decision, and the law is merely a facilitator. Liquidation isn't always a terrible thing. The resources sunk in bankrupt enterprises are liberated for more effective uses in the economy through liquidation.
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