IBC’s great­est feat

Two years on, it has ended the cul­ture of im­punity

Business Standard - - OPINION -

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.

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