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Appraisal of IBC

 GS Paper 3

 Syllabus: Indian Economy

 

Source: BS

 Context: The article assesses the effectiveness of India’s Insolvency and Bankruptcy Code (IBC), enacted in 2016, in resolving financial distress and enhancing economic well-being. The IBC aims to address Non-performing Assets (NPAs) and debt defaults.

 

What is IBC?

The Insolvency and Bankruptcy Code (IBC), enacted in 2016, is a comprehensive legal framework in India that replaced existing laws related to insolvency and bankruptcy. It provides a uniform procedure for resolving financial distress, addressing Non-performing Assets (NPAs), and managing debt defaults. The primary goal of the IBC is to streamline and expedite the resolution of insolvency and bankruptcy disputes in a time-bound manner.

 

IBC and its performance

  1. Initiated cultural shift: The IBC has initiated a cultural shift in the dynamics between lender and borrower, promoter and creditor. It played a critical role in reshaping the behaviour of borrowers.
    1. Before the enactment of the IBC, the recovery mechanisms available to lenders were through Lok Adalat, the Debt Recovery Tribunal and the SARFAESI Act.
    2. While the earlier mechanisms resulted in a low average recovery of 23%, the recoveries have risen to 43% under the IBC regime.

 

  1. Reduction in NPAs: IBC significantly reduced banks’ NPA rate, dropping from 14.8% (September 2018) to 3.2% (September 2023).
  2. Increase in Bank Profits: Banks experienced a turnaround, achieving a historic profit of €2.63 trillion in 2022-23, compared to a loss in 2017-18.
  3. Improvement in Corporate Balance Sheets: Post-IBC, firms demonstrated enhanced performance with robust balance sheets, improved leverage management, and an interest coverage ratio exceeding 3.5.
  4. Enhancement in Corporate Governance: IBC led to improved corporate governance, evidenced by a reduction in related party transactions, as highlighted in a post-IBC study.
  5. Global Ranking Improvement: India’s global insolvency resolution ranking improved significantly, moving from 136th to 52nd within the first three years of IBC implementation.
    1. India won the Global Restructuring Review award for the most improved jurisdiction in 2018.
    2. An IMF-World Bank study in January 2018 observed that India is moving towards a new state-of-the-art bankruptcy regime.
  6. Stability in financial systems: Recovery through the IBC was about Rs 70,000 crore in fiscal 2019 twice the amount recovered through other resolution mechanisms in fiscal year 2018.
    1. The recovery rate is also twice the liquidation value for these 94 cases, which underscores the value maximization possible through the IBC process.

 

Issues with the IBC

  1. Overburden NCLT benches: The number of NCLT benches is 16 and the total number of bench members is only 20
  2. Inefficient Time Management: IBC’s resolution processes are prolonged, averaging 867 days, far beyond the intended 180 days.
  3. Gap in Asset Value Maximization: Resolutions achieve only 86% of fair company value, indicating a shortfall in desired value maximization.
  4. High Incidence of Liquidation: IBC results in more liquidations than rescues, especially impacting already sick or defunct companies. Many liquidated firms had assets valued at about 5% of their claims.
  5. Methodological Issues in Appraisal: Some appraisals of IBC’s performance use flawed methodologies, focusing solely on recovery rates and overlooking factors like realizations from equity holdings or guarantor resolution.
  6. The low approval rate of resolution plans: According to the data from the Insolvency and Bankruptcy Board of India (IBBI), of the 2,542 corporate insolvency cases filed between December 1, 2016, and September 30, 2019, about 156 have ended in approval of resolution plans — a mere 15%.

 

Way forward

The insolvency litigation process should focus on minimizing duration and case volumes to alleviate uncertainties. In France, reforms in 2021 extended the process to ensure full judicial resolution of specific disputes before confirming a restructuring plan. Empowering the insolvency professional or assigning a supervisory judge, as done in France, can grant exclusive authority for vital settlements with insolvent companies, some requiring court ratification.

  

Conclusion

The IBC is a crucial structural reform, which if implemented effectively and in a time-bound manner can produce major gains for the corporate sector and the economy as a whole.

 

Prelims Links:

Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news? (UPSC 2017)

(a) It is a procedure for considering the ecological costs of developmental schemes formulated by the Government.
(b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
(c) It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.
(d) It is an important provision in ‘The Insolvency and Bankruptcy Code’ recently implemented by the Government.

 

Ans: B