IBC’s greatest feat
Two years on, it has ended the culture of impunity
It has now been two years since the major financial reform of the National Democratic Alliance government, the Insolvency and Bankruptcy Code, or IBC, was introduced. The IBC was a longawaited demand of many economists, who argued that it would speed up the circulation of capital and make the markets for capital more flexible. India had long been bedevilled by what former Chief Economic Advisor Arvind Subramanian used to call the “problem of exit”, meaning that entering a business was easy but exiting it was hard — if a business turned unprofitable, then capital would be locked up in it while ineffective solutions were tried in order to recover the best value from the assets. The promise of the IBC was that there would be a clear resolution procedure, presided over by a qualified resolution professional or RP. Further, the resolution would be time-bound — the IBC specified a 270-day deadline for the process. The hope was that not only would some of the assets be revived, but also the capital locked up in them would be freed and that banks would be able to use the IBC process as part of the larger effort to clean up their balance sheets.
As a series of reports in this paper yesterday showed, two years on, the realisation of much of that promise is still in the future. As with any major reform, some issues have cropped up in the implementation of the IBC, which needed to be addressed. Aspects of the new law also have had to be tested in court. For example, for long there were open questions about the rights of home-buyers when a real estate company went bankrupt. This and other such lacunae had to be addressed by the courts or by interventions by the government in the form of Ordinances and amendments. As a partial consequence, many of the cases are running behind schedule. Only 5 per cent of the cases in the IBC have been resolved so far — 52 out of 1,198. The large accounts that the Reserve Bank of India first sent as test cases to the IBC back in June of last year have not all been resolved -- it is more than 450 days since some of them entered a supposedly time-bound process. The lack of capacity at all levels of the insolvency process is not helping. The National Company Law Tribunal, or NCLT, is shorthanded, with only 28 members in spite of having to deal with 1,000 cases. Further, the forensic audits required in order to satisfactorily move ahead with the resolution process is taxing on the auditors, and can take weeks — but there is not enough auditorial capacity to meet the enormous demand. Another concern is that there appears to be a lack of confidence in the process, which is reflected in systematic under-bidding by those who wish to take over an asset that is up for sale. Bidders are both concerned that the legal loopholes have not been ironed out and that there may be missing information. As a result, lenders have got back less than half the money that they had tied up in these assets — which is, however, still better than the 26 per cent that was the case in the pre-IBC mechanism.
Overall, however, it cannot be argued that the IBC, while a work in progress, is anything other than a success. The most important aspect of the reform is that it has ended the impunity of company promoters who could believe that they could run a company into the ground and still retain control of it by hook or by crook. The realisation that promoters do not have the divine right to stay in charge regardless of how badly they mismanage an enterprise has finally set in. The restrictions on who can bid for an asset are considered too tight by some bankers, but have the effect of ensuring that promoters are kept far away from the assets that they might want to reclaim. Ending the culture of impunity and changing borrowers’ mindset is a great achievement.