Transforming business and the insolvency system

GS 3-ECONOMY Indian Economy and issues relating to planning, mobilization of resources.

Introduction         

The Insolvency and Bankruptcy Code, 2016 (IBC) is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.

  • The IBC, along with the Goods and Services Tax regime, among other key reforms, were helping in significantly improving the ease of doing business in India.
  • Enabling it to emerge as a ‘Make for World’ platform.

Recently In News:

  • The Prime Minister mentioned the Insolvency and Bankruptcy Code (IBC 2016) as one of the key legislative reforms that would help aid India’s path to self-reliance on a high growth trajectory.
  • also credited these reforms for a surge in Foreign Direct Investment into India in 2019-2020.
  • to the tune of nearly $74.5 billion, or a significant increase of 20% from the previous year.

Importance:

  • Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
  • Bankruptcy,is a situation whereby 
    • having passed appropriate orders to resolve it.
    • protect the rights of the creditors.
    • is a legal declaration of one’s inability to pay off debts.
  • Insolvency and Bankruptcy Code IBC 2016:
    • is considered as one of the biggest insolvency reforms in the economic history of India.
    • is both flexible and dynamic.
      • makes it impactful
      • given how forward thinking the concept of an omnibus legislation of its nature actually is.
    • enacted for reorganization and insolvency resolution
      • of corporate persons, partnership firms and individuals.
      • in a time bound manner
      • for maximization of the value of assets of such persons.
    • to consolidate all laws related to insolvency and bankruptcy and to tackle Non-Performing Assets (NPA).
    • to exercise regulatory oversight over 
      • insolvency professionals
      • insolvency professional agencies
      • information utilities.
    • Insolvency professionals handle the commercial aspects of insolvency resolution process.
    • Insolvency professional agencies develop
      • professional standards
      • code of ethics
      • be first level regulator for insolvency professionals members 
      • leading to development of a competitive industry for such professionals.

Current Status:

  • In March this year, the government raised the threshold for invoking insolvency under the IBC to Rs 1 crore from Rs 1 lakh
  • with a view to prevent triggering of such proceedings against small and medium enterprises that are facing the heat of coronavirus pandemic.
  • IBC goes beyond other similar pieces of legislation across the world
    • The Insolvency and Bankruptcy Board of India (IBBI),has established an unprecedented organisation that both regulates and develops insolvency policy and assesses market realities.

Objectives: 

  • Two key drivers are 
    • relatively short time-bound processes
    • the focus on prioritising resolution (rather than liquidation to support companies)
  • Core implication has been to allow credit to flow more freely to and within India.
  • Promoting investor and investee confidence.

Achievements:

  • Has successfully instilled confidence in the corporate resolution.
    • streamlined insolvency processes in a sustainable, efficient and value retaining manner.
  • Improvement in India’s Ease of Doing Business Rankings to 63 rd place.
  • Resolving Insolvency Index (component of Ease of Doing Business), 
    • India’s ranking improved to 52 in 2019 from 108 in 2018.
  • Recovery Rate improved 
    • from 26.5% in 2018 to 71.6% in 2019.
  • Overall time taken in recovery also improved
    • coming down from 4.3 years in 2018 to 1.6 years in 2019.

Limitations:

  • Data from the Insolvency and Bankruptcy Board of India (IBBI)
    • of the 2,542 corporate insolvency cases filed between 2016 and 2019, about 156 have ended in approval of resolution plans 
    • a mere 15%.
  • High number of liquidations 
    • it violates IBC’s principal objective of resolving bankruptcy.
  • Slow judicial process in India 
    • allows the resolution processes to drag on
    • this was the same reason for slow recovery under SICA or RBBD.

Way Forward 

  • Other legislative measures that will further improve the investment climate
    • the rolling out of the commercial courts
    • commercial divisions
    • Commercial Appellate Divisions Act, 2015
      • to allow district court-level commercial courts, and the removing of over 1,500 obsolete and archaic laws.
    • These highlight a major and multi-dimensional effort by the government
      • to provide comfort,relief and reliability to the potential investors.
    • There could perhaps be a look at institutionalising the introduction of a pre-packed insolvency resolution process
      • the need for which is highlighted by the necessary suspension of the IBC proceedings.
    • Will also help resolve matters expeditiously, outside of the formal court system.
    • Allow resolution even during the COVID-19 altered reality.
  • The need for social distancing and the suspension or limitation of physical hearings
    • a concerted effort should be made to enhance the role of digitally conducting all processes and hearings 
    • to achieve greater efficiency in the new normal.
  • Bringing in technology would help 
    • ease of access to justice 
    • ease of doing business from a process and efficiency standpoint.

Conclusion 

       The IBC has provided a major stimulus to ease of doing business, enhanced investor confidence and helped encourage entrepreneurship while also providing support to MSMEs. Its further streamlining and strengthening will surely instil greater confidence in both foreign and domestic investors as they look at India as an attractive investment.

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