Modi 3.0: Why Nirmala Sitharaman prioritises IBC 2.0 overhaul in first 100 days?
Finance and Corporate Affairs Minister Nirmala Sitharaman has an important job of improving the implementation of the Insolvency and Bankruptcy Code (IBC), a key law for managing corporate and personal bankruptcies, said experts.
In the first hundred days of the new Modi 3.0 government, the Corporate Affairs Ministry (MCA) should focus on fixing implementation issues around IBC and dealing with judicial delays that hinder its efficiency, they added.
As against the IBC-mandated time-bound resolution process of 330 days (including litigation and other judicial processes), the average time taken for resolution completion is now over 800 days. They said this calls for addressing the implementation issues to prevent delays.
While the IBC mandates a time-bound resolution process, judicial delays hinder its effectiveness. The National Company Law Tribunal (NCLT) oversees the resolution process and is often overburdened with cases, leading to delays.
Reserve Bank of India (RBI) Governor Shaktikanta Das had earlier this year flagged that the inordinate delays in resolving stressed assets in bankruptcy courts eroded their value.
There is a significant delay in the admission of cases under IBC. The average time taken for case admission during FY21 and FY22 stood at 468 days and 650 days, respectively.
While there may be inordinate delays in completing the resolution process as mandated under IBC, the timelines are much better than the record of the average time (2.5 years) taken for SARFAESI law, or 20 years under the winding-up regime, or civil court cases.
Another important issue impacting the outcome of IBC is the absence of discipline and adherence to timelines among corporate debtors, creditors, and insolvency professionals.
“Insolvency resolution process is an orchestra. Every player has a defined role. Therefore every player (debtors, creditors and resolution applicants) must be subject to regulatory discipline”, M.S.Sahoo, former Chairman of the Insolvency and Bankruptcy Board of India (IBBI), told businessline.
When there is misconduct on their (debtor, creditor or IP) part, the regulatory authorities are helpless. The need of the hour is to bring them under regulatory discipline through IBC.
Today debtors, creditors, and the resolution applicants are not subject to any regulatory discipline. However, many instances have come to the fore where debtors and creditors have misbehaved, and no action has been taken against them except going to criminal court for prosecution.
The way IBC regulatesInsolvency Professional Agency (IPA) and Information Utility, sources said they (debtors, creditors and IPs) should also be subject to regulation.
EASE OF EXITS
Sitharaman would also, as a key minister of Modi 3.0, need to take an important call implementing of IBC for partnerships and sole proprietorships.
MSMEs are the backbone of the Indian economy, and India has nearly 65 million registered MSMEs (the actual number could be 130 million). The real entrepreneurial activity is centred around MSMEs, and experts said there has to be ease of exit for entrepreneurs functioning as partnerships or sole proprietorships, experts said. There has to be freedom of exit. Entrepreneurs must get honourable exits, they said.
They noted that although the IBC provides for an insolvency framework for partnerships and sole proprietorships, these provisions have so far not been implemented so far.
LEGAL CHANGES
Sitharaman, who got the portfolio of Finance and Corporate Affairs on Monday, is also expected to make a crucial call on whether India needs a cross-border insolvency framework. Legislative change to IBC is also necessary to usher in a Group Insolvency framework.
The government is still not fully convinced that cross-border insolvency will benefit India. Sources said no study has been done on cross-border insolvency to help understand its benefits for India vis-a-vis other countries.
She is also expected to take a call on extending the concept of pre-packaged insolvency to large corporates. Currently, this facility has been extended only to MSMEs.