Page 51 - Banking Finance March 2021

FEATURE

IBC AND THE ‘DE-STRESSING’ OF

INDIA INC

T he Covid-19 pandemic has been driving corporate globally, it is important that financially distressed companies

can still access the credit market thanks to a strong
failures around the world, including in India. In
bankruptcy system and survive under stressed scenarios. In
the absence of the much-needed institutional
arrangements in many developing countries,
IBC is a one-stop solution for resolving insolvencies, aiming
following default, a given firm’s management, capital and this regard, our recent study adds to the evidence that the
labour would come to a standstill, pushing it into liquidation. to protect the interests of small investors and making the
process of doing business less cumbersome.
A sound bankruptcy process can rapidly resolve such a
default scenario resulting in more entrepreneurship, greater Using a panel of 33,845 non-financial
risk taking, and better access to debt markets. Amid firms for the period of 2008-19 and by exploiting a
lockdowns and economic shutdowns, we evaluate India’s difference-in-differences analysis, we studied the impact of
bankruptcy law in terms of its effectiveness for financially the IBC policy on the availability of longand short-term
distressed firms.
financing for, and the cost of, credit of distressed firms as
compared to their non-distressed counterparts.
Creditor rights in India
A credit ecosystem that effectively balances the rights of As in most emerging markets, India’s debt market is
creditors and debtors is crucial for the development of dominated by state-owned banks and the domestic credit
capital markets and to increase entrepreneurial activities to private sector by banks (percentage of GDP) is 50 per cent
in a country. In the context of India, there was no efficient in 2019 compared to a world average of 90.5 per cent
bankruptcy reform until 2016 and corporate insolvency (Source: World Development Indicators). Recent statistics
procedures were contained under different legislation such from World Bank’s Doing Business Data show the creditor
as the Sick Industries and Companies Act of 1985 (SICA rights index in India improving from 6 in 2014 to 9 in 2019
1985), the Debt Recovery Tribunal Act of 1993 (DRT Act), compared to the world average of 5.67 in 2019. In India, it
and the Securitisation and Reconstruction of Financial Assets used to take 4.3 years to resolve insolvency in 2014 which
and Enforcement of Security Interests Act of 2002 (SARFAESI declined to 1.6 years in 2019 compared to the world average
Act). of 2.47 years in 2019.

As resolving insolvency was a challenge in the Indian The IBC reform

multilayered legal framework, the government instituted a Under the IBC, companies have to complete the insolvency
new more efficient mechanism called the Insolvency and process within 270 days, whereas for smaller companies
Bankruptcy Code (IBC) on May 28, 2016. (identified as those with an annual turnover of no more than
Rs. 10 million), it should be completed within 90 days (with
In the light of the Covid-19 pandemic and business failures a potential further 45 day-extension). If debt resolution does

BANKING FINANCE | MARCH | 2021 | 51