Transforming business and the insolvency system
Paper:
Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management
Context:
Further streamlining of the Insolvency and Bankruptcy Code can instill more confidence in foreign and local investors.
Why it a key reform step?
- It is one of the key legislative reforms that would help aid India’s path to self-reliance on a high growth trajectory.
- 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 and enabling it to emerge as a ‘Make for World’ platform.
- Because of these reforms, 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 per cent from the previous year is recorded.
IBC, a far-ranging and structurally significant reform:
- IBC has Replaced bankruptcy law regime.
- It focuses on time-bound resolution, rather than liquidation, as an empowering tool to support companies falling within its ambit.
- It has successfully instilled confidence in the corporate resolution methodology, and perhaps, more importantly, on creating a possibility for the creditors recouping some of their investments in firms being liquidated or going in for resolution.
- Its core implication has been to allow credit to flow more freely to and within India while promoting investor and investee confidence.
- Despite the suspension of the IBC for a limited duration due to the COVID 19 pandemic, in the short, medium and long term, it will prove to have been a timely reform.
- It will greatly streamline insolvency processes in a sustainable, efficient, and value retaining manner.
Concern:
- India, suffers from a serious backlog in court cases, to the tune of nearly four crore matters pending final judgment.
- The novel coronavirus pandemic is likely to exacerbate this.
- The enforceability of contracts has been a challenge.
- On an average, it takes as many as 1,445 days for a contract to be enforced, and that too at a cost of nearly 31% of the claim value.
Moves that will help
- Other legislative measures commercial courts, commercial divisions and the Commercial Appellate Divisions Act, 2015, will further improve the investment climate.
- Together with the IBC, these highlight a major and multi-dimensional effort to provide comfort, relief and reliability to the potential investors.
- The Ministry of Corporate Affairs (MCA), in its year end summary press release, provided the context of India’ s rapid rise in the Ease of Doing Business rankings, and IBC’s important role of the IBC in it.
- According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018, a leap of 56 places.
- The recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019.
- The overall time taken in recovery also improved nearly three times, coming down from 4.3 years in 2018 to 1.6 years in 2019.
Focus on prioritising resolution rather than liquidation:
- The report of the Bankruptcy Law Reforms Committee speaks of the critical need for speed in the working of the bankruptcy code.
- The inability to make significant decisions without full clarity of ownership and control delays resolution.
- The longer the delay, the more likely that the entity in question would move towards liquidation rather than resolution.
- The delays result in low value liquidation due to a high economic rate of depreciation.
- Higher value stems from the firm being acquired as a going concern.
Way forward:
- Institutionalising the pre-packed insolvency resolution process:
- Institutionalising the introduction of a pre-packed insolvency resolution process, the need for which is highlighted by the necessary suspension of the IBC proceedings should be taken into consideration.
- This will also help resolve matters expeditiously, outside of the formal court system, and allow resolution even during the COVID-19 altered reality.
- Helping MSMEs
- The MCA along with IBBI are working diligently on putting in place a Micro, Small and Medium Enterprises (MSME) and non-MSME framework to help expedite this process.
- Given 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 and greatly help ease of doing business from a process and efficiency standpoint as well.
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 destination.