India’s Insolvency Framework Shows Positive Trends

The Insolvency and Bankruptcy Board of India (IBBI) has reported improvement in corporate resolutions under the Insolvency and Bankruptcy Code (IBC). The latest findings indicate a consistent increase in successful resolutions alongside a sharp decline in liquidations. This trend has emerged since the fiscal year 2020-21, reflecting the growing effectiveness of India’s insolvency framework.

Trends in Corporate Resolutions

Recent data reveals that the ratio of corporate debtors resolved to those liquidated has dramatically improved. In 2017-18, for every corporate debtor resolved, five went into liquidation. By 2024-25, this ratio improved to 1.3 liquidations for each resolution. This shift indicates a positive trend in the resolution process, suggesting that more companies are being salvaged rather than liquidated.

Challenges in Liquidation Processes

Despite the positive trends in resolutions, challenges remain in the liquidation process. The amounts realised by claimants in completed liquidation cases have been notably low. In some instances, the realisations fell below the liquidation value. IBBI Chairman Ravi Mital emphasised the need for further reforms to enhance outcomes for claimants in the liquidation process.

Regulatory Improvements

IBBI has made several amendments to the liquidation process regulations to boost efficiency. These changes aim to streamline procedures and improve the overall effectiveness of the insolvency framework. The ongoing efforts reflect a commitment to enhancing the resolution landscape in India.

Impact of the IBC

The decline in the Liquidation to Resolution ratio serves as evidence of the IBC’s effectiveness. Hari Hara Mishra, CEO of the Association of Asset Reconstruction Companies in India, noted that portion of liquidated cases originated from defunct entities, indicating a need for focused evaluation of liquidation processes. The IBC has successfully attracted a growing number of resolution applicants from diverse sectors, enhancing opportunities in distressed assets.

Achievements of IBBI

In less than a decade since its establishment, IBBI has achieved remarkable progress in corporate resolutions. Anjali Jain, a partner at Areness, brought into light that the strategies employed by IBBI, in conjunction with government support, have led to increased participation in the resolution process. This collaborative approach has resulted in improved outcomes for distressed companies.

Future Outlook

The positive trends observed in corporate resolutions under the IBC suggest a maturing insolvency framework in India. Continued regulatory improvements and a focus on enhancing liquidation outcomes will be crucial for maintaining this momentum. The ongoing efforts by IBBI and stakeholders aim to create a more robust environment for resolving corporate distress.

Questions for UPSC:

1. Discuss the significance of the Insolvency and Bankruptcy Code in improving corporate governance in India.
2. Critically examine the factors leading to the decline in liquidation cases under the Insolvency and Bankruptcy Code.
3. Explain the role of regulatory bodies in enhancing the effectiveness of insolvency frameworks globally.
4. With suitable examples, discuss the impact of distressed asset management on economic recovery in post-pandemic India.

Answer Hints:

1. Discuss the significance of the Insolvency and Bankruptcy Code in improving corporate governance in India.

1. IBC provides a structured framework for resolving insolvency, enhancing transparency and accountability.
2. It encourages timely decision-making, reducing the time companies spend in distress.
3. Promotes responsible management by holding directors accountable for financial mismanagement.
4. Facilitates better creditor recovery rates, thus encouraging trust among investors.
5. Encourages the rehabilitation of viable businesses, contributing to overall economic stability.

2. Critically examine the factors leading to the decline in liquidation cases under the Insolvency and Bankruptcy Code.

1. Improved resolution mechanisms have made it easier for distressed companies to find buyers.
2. Increased awareness and understanding of the IBC among stakeholders, including creditors and debtors.
3. Government support and regulatory amendments have streamlined the resolution process.
4. Growing participation of resolution applicants from diverse sectors enhances competition and options.
5. Focus on preserving businesses rather than liquidating them has shifted corporate culture.

3. Explain the role of regulatory bodies in enhancing the effectiveness of insolvency frameworks globally.

1. Regulatory bodies establish guidelines and standards for insolvency procedures, ensuring consistency.
2. They monitor compliance and enforce laws, promoting fair practices among stakeholders.
3. Facilitate training and capacity building for professionals involved in insolvency processes.
4. Encourage international cooperation, sharing best practices to improve local frameworks.
5. Regularly review and amend laws to adapt to changing economic conditions and needs.

4. With suitable examples, discuss the impact of distressed asset management on economic recovery in post-pandemic India.

1. Distressed asset management has enabled the revival of viable businesses, contributing to job retention.
2. Successful resolutions, like the recovery of Jet Airways, illustrate the potential for economic revitalization.
3. Improved asset recovery rates enhance liquidity in the market, stimulating investment and growth.
4. Encourages foreign investment by demonstrating a robust insolvency framework and legal recourse.
5. Facilitates the reallocation of resources to more productive sectors, driving overall economic recovery.