IBC changes hit recoveries, says parliamentary panel
NEW DELHI: Amendments to the Insolvency and Bankruptcy Code (IBC) have altered its basic design, giving it a spin initially not thought of, a parliamentary panel said, while calling for it to be “revisited”.
The parliamentary standing committee on finance chaired by the Bharatiya Janata Party (BJP) leader Jayant Sinha, in a report tabled in the Lok Sabha on Tuesday, pointed to the low recovery rate and delays in resolution.
It also recommended that the pre-pack scheme—an informal alternative bankruptcy resolution scheme offered to small businesses—may be opened to bigger corporations, too.
The panel suggested that efforts to incorporate cross-border bankruptcy resolution provisions into IBC may be expedited.
The Rajya Sabha on Tuesday passed the IBC (Amendment) Bill, 2021, that replaces an ordinance issued in April rolling out the pre-pack resolution scheme for small businesses.
This Bill was passed by the Lok Sabha on July 28.
The standing committee flagged in the report that haircuts taken by lenders are as much as 95% and more than 71% of the cases are pending for more than 180 days. These, the report said, point to a deviation from the original objectives of the Code as intended by Parliament. “The Committee, therefore, feels that the design and implementation of the Code as it has evolved needs to be revisited, particularly in the light of its original aims and objects,” the report said.
IBC is one of the major reforms undertaken by the Narendra Modi administration, which helped India improve its ‘ease of doing business’ score in World Bank rankings.
However, in the last four years, the economic growth rate has been on a downturn, with
FY21 ending with a 7.3% contraction. The panel credited IBC for reducing the bankruptcy resolution time from 4.3 years in 2017 to 1.6% in 2020 and for improving India’s ‘ease of doing business’ and ‘getting credit’ rank between 2017 and 2020.
The panel, however, pointed out that the fundamental aim of this statute was to secure creditor rights, which would lower borrowing costs.
“Greater clarity in purpose is needed with regard to strengthening creditor rights through the mechanism devised in the Code, particularly considering the disproportionately large and unsustainable haircuts taken by the financial creditors over the years,” the panel said.