Transforming business and the insolvency system
The Insolvency and Bankruptcy Code, along with the Goods and Services Tax regime, among other key reforms, have helped in significantly improving the ease of doing business in India and enabling it to emerge as a ‘Make for World’ platform. These reforms have led to 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.
A key reform step –
- Replacing a rather inefficient bankruptcy law regime, the IBC has focused 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. 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.
- According to the Resolving Insolvency Index, India’s ranking improved to 52 in 2019 from 108 in 2018, a leap of 56 places. Further, the recovery rate improved nearly threefold from 26.5% in 2018 to 71.6% in 2019. And, 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.
Need of IBC –
India, unfortunately, suffers from a serious backlog in court cases, to the tune of nearly four crore matters pending final judgment. 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. This is simply unacceptable.
Upcoming reforms –
- The Government of India is also working toward decriminalisation of minor offences. It will significantly reduce the risk of imprisonment for actions or omissions that are not necessarily fraudulent or an outcome of mala fide intent. The government’s intent is to help differentiate between good faith mistakes and intentional bad faith actions, so as to penalise the former, and criminalise the latter.
- Other legislative measures that will further improve the investment climate, include the rolling out of the commercial courts, commercial divisions and the Commercial Appellate Divisions Act, 2015, to allow district court-level commercial courts, and the removing of over 1,500 obsolete and archaic laws.
- Two key drivers for the IBC are relatively short time-bound processes, and the 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. It is clear that the inability to make significant decisions without full clarity of ownership and control delays resolution. And, the longer the delay, the more likely that the entity in question would move towards liquidation rather than resolution.
- Going forward, 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. This will also help resolve matters expeditiously, outside of the formal court system.
Way forward –
- 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.
- At the same time, a concerted effort should be made to enhance the role of digitally conducting all processes and hearings to achieve greater efficiency. 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.
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.
Source – The Hindu
QUESTION – The Insolvency and Bankruptcy Code 2016 has proved to be a boon for investor confidence. Discuss its performance and the need to further streamline the process in the wake of COVID-19 reality.