Resetting the bar

Stressed assets can be better dealt with

India’s Insolvency and Bankruptcy Code (IBC) got more teeth on Thursday after the president signed an ordinance that streamlines the process of restructuring bankrupt companies. The Code, which came into effect last year, now has provisions to prevent wilful defaulters from bidding for companies that are put up for sale under it.

The IBC is a landmark in India's economic reforms. Before it was promulgated, reforms had focused on the setting up of businesses, rather than their closure. By putting in place a mechanism for the resolution of credit liabilities of insolvent companies, the Code has opened the door for the reallocation of capital to enterprises that are likely to make better use of it. Before Thursday’s ordinance, the Code tried to deal with such problems through a regulatory mechanism put in place by the Insolvency and Bankruptcy Board of India (IBBI). Though the thinking behind this regulation was the same as Thursday’s ordinance — making sure that promoters don’t regain their defaulting company at a discount — it was also felt that the measure would burden the IBBI’s already-overstressed regulators, which have more than 300 insolvency cases before them. More importantly, the creditors feared that the curbs on bidding by promoters would not hold up in court. Thursday’s ordinance takes care of such concerns.