India’s Bankruptcy Law Reforms for Efficient Resolutions

The Government of India is actively considering reforms to its bankruptcy laws. This follows growing concerns over the lengthy court processes and low recovery rates associated with insolvency cases. The Insolvency and Bankruptcy Board of India (IBBI) is finalising proposals aimed at expediting resolution processes. Public consultation regarding these proposals is ongoing, with the possibility of an extension to the deadline.

Current Challenges in Bankruptcy Proceedings

Insolvency cases in India often take years to resolve. The average time for court approval of resolution plans was 821 days in the last nine months of 2025. This duration represents a 35 per cent increase compared to the previous fiscal year. Such delays erode asset values and negatively impact recovery rates for lenders. Investors recovered only 28 per cent of their loans during the financial year ending March 2024, down from 46 per cent in 2018-2019.

Proposed Changes to the Bankruptcy Framework

The proposed reforms aim to streamline the insolvency process. Key changes include allowing courts to handle complex insolvencies through joint hearings. This approach would treat interconnected businesses as a single entity rather than as separate cases. Additionally, the reforms seek to resolve creditor disputes more efficiently without hindering progress toward resolution plans.

Encouraging Interim Financing

The reforms also aim to promote interim financing. This financing allows lenders to engage in creditor meetings as observers. Such participation can help maintain asset values during insolvency proceedings. Interim financiers play important role by providing necessary funds that can stabilise distressed companies.

Impact on Asset Reconstruction Companies

The proposed changes could benefit asset reconstruction companies (ARCs). These firms purchase non-performing loans from traditional lenders. By enhancing their role in the insolvency process, ARCs may gain more influence. This shift could attract private credit funds to engage more actively in special situations involving distressed assets.

Global Investor Confidence

India’s bankruptcy reforms are critical for boosting global investor confidence. Investors have historically been cautious about lending in India due to the protracted nature of insolvency cases. By improving efficiency and recovery rates, the government aims to create a more favourable environment for investment.

Future Outlook

The proposed reforms are expected to lead to faster resolutions and better recovery outcomes. Stakeholders, including lenders and investors, are optimistic about the potential improvements. The ongoing public consultation reflects the government’s commitment to enhancing the bankruptcy framework.

Questions for UPSC:

1. Critically analyse the impact of prolonged insolvency proceedings on the Indian economy.
2. Explain the role of asset reconstruction companies in the insolvency process and their significance for lenders.
3. What are the implications of joint hearings for interconnected businesses in insolvency cases?
4. Comment on the importance of interim financing in preserving asset value during insolvency resolutions.

Answer Hints:

1. Critically analyse the impact of prolonged insolvency proceedings on the Indian economy.

1. Extended insolvency proceedings lead to prolonged uncertainty, discouraging investment.
2. Delays erode asset values, resulting in lower recovery rates for lenders.
3. Increased time for resolutions can strain financial institutions, impacting credit availability.
4. Prolonged cases may lead to job losses, affecting overall economic stability.
5. Global investor confidence diminishes, hindering foreign direct investment and economic growth.

2. Explain the role of asset reconstruction companies in the insolvency process and their significance for lenders.

1. Asset reconstruction companies (ARCs) purchase non-performing loans, helping banks clean up their balance sheets.
2. ARCs facilitate the restructuring of distressed assets, aiming to recover value for lenders.
3. They provide expertise in managing and resolving bad debts, enhancing recovery outcomes.
4. ARCs can stabilize distressed companies through interim financing, preserving asset value.
5. Increased involvement of ARCs can attract private credit funds, boosting market liquidity.

3. What are the implications of joint hearings for interconnected businesses in insolvency cases?

1. Joint hearings streamline the resolution process for complex, interconnected entities.
2. This approach reduces redundancy and accelerates decision-making in insolvency proceedings.
3. It encourages collaboration among creditors, potentially leading to more favorable outcomes.
4. Joint hearings can help maintain the operational integrity of interconnected businesses.
5. They may improve recovery rates by addressing issues collectively rather than in isolation.

4. Comment on the importance of interim financing in preserving asset value during insolvency resolutions.

1. Interim financing provides essential liquidity to distressed companies, enabling operational continuity.
2. It helps maintain asset values, preventing further deterioration during insolvency proceedings.
3. Participation of interim financiers in creditor meetings can lead to more informed decision-making.
4. Such financing encourages stakeholder engagement, encouraging collaboration among creditors.
5. Overall, it enhances the prospects for successful restructuring and recovery of debts.