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IBC 2nd Generation Reforms
Context:
Amitabh Kant, G20 Sherpa and former Niti Aayog CEO, called for second-generation reforms to the Insolvency and Bankruptcy Code (IBC).to address concerns with the current functioning of the Code.
Why the need for IBC 2nd Generation Reform:
- Rising Insolvency Resolution Timeline at NCLT: Insolvency resolution at NCLT averaged 716 days in FY24, up from 654 days in FY23.
- Delays in Case Admission at NCLT: Case admission delays increased, with the average time rising from 468 days in FY21 to 650 days in FY22.
- Declining Creditor Recovery Rates: Creditor recovery rates fell from 36% in FY23 to 27% in FY24, bringing the cumulative recovery rate since IBC’s inception in 2016 to 32%.
- Alignment with Global Standards : Reforming the IBC can help align India’s insolvency framework with international best practices, improving investor confidence.
- Inadequate Infrastructure: The existing court management systems are under-resourced, necessitating the incorporation of private sector expertise and technology.
Proposed 2nd Generation Reforms:
- Opening Doors for Private Players : Opening doors for private players and technology use was proposed to improve court management, similar to the privatisation of passport Seva Kendras.
- Judicial Process Reengineering : Judicial process reengineering through private investments and innovations could help reduce delays and arrears in court cases.
- Necessity for Substantive Changes to IBC: Substantive changes to IBC are necessary, particularly concerning cross-border insolvency, creditor rights, sector-specific nuances.
- Enhancing Operational Efficiencies in Bankruptcy Reform: To accelerate the bankruptcy resolution process, especially for MSMEs, it is vital to adopt innovative methods like pre-pack arrangements, build interdisciplinary capacity among resolution professionals, and reduce judicial delays.
Impact of 2nd Generation Reform:
- Faster Resolution
- Improved Recovery Rates: Enhanced mechanisms, such as pre-pack arrangements, are expected to boost creditor recovery rates.
- Lower Legal Costs: Simplified procedures can decrease the legal expenses associated with insolvency proceedings.
- Increased Access to Capital: A more efficient framework encourages lenders to extend credit, particularly to MSMEs.
- Enhanced Professional Capacity: Interdisciplinary training for resolution professionals will improve expertise in handling insolvency cases.
IBC 2016 and its Impact
The IBC was designed to create an efficient, transparent, and timely framework for resolving financial distress. It promotes creditor rights and economic growth by establishing a clear legal structure that balances debtor and creditor interests, outlines a hierarchy for debt repayment, and fosters an environment for business rescue and asset realisation.
Key Achievements of the IBC’s Implementation
Impact on Corporate Debtors:
- As of January 2024, 7,058 corporate debtors were admitted into the Corporate Insolvency Resolution Process (CIRP).
- Successful resolutions accounted for 16% of cases, with 19% of cases settled before admission.
Recovery Rates:
- Creditors have realised ₹3.16 lakh crore from admitted claims of ₹9.92 lakh crore (32% recovery rate).
- When evaluated against liquidation and fair value, recovery rates improve significantly (169% and 86% respectively).
- Behavioural Shift: The credible threat of insolvency has strengthened creditors’ negotiation power, leading to 26,518 applications for initiation of CIRPs withdrawn before admission.