[op-ed snap] The efficiency promise of the bankruptcy code

Mains Paper 3 : Indian Economy |

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : IBC - analysis

Context

It has been 3 years since the Insolvency and Bankruptcy Code (IBC) is passed, and it remains a work in progress. 

Background to IBC

• It had envisaged a mechanism by which creditors could wholly or partially recover their dues from a company unable to pay back.
• The insolvent business taken over is to be revived or sold off so that its assets could swiftly get back to generating value under new ownership. 
• In theory, it’s about capital moving to the best hands. 

Updates – Online Bidding

• Recent reports suggest the government may bring in a short, time-bound online bidding process to resolve corporate bankruptcy cases. 
• This is likely to improve transparency and reduce litigation over business failures.
• This would be an efficient way to deal, which is crucial for an economy to optimize its allocation of resources. 

Amendments

• Last year, it was amended to protect homebuyers, placing them at par with financial creditors. 
• 8 changes were made to ease the resolution process, the most important one being an extension of the maximum time that can be taken to a more realistic 330 days.

Outcomes – Drawbacks

• At the heart of the IBC legislation was its time-bound approach to resolving insolvency cases. But the initial 270-day deadline proved inadequate. 
• Several lenders unsure of their stance; some promoters trying every legal device to retain their firms, and the very process frequently getting caught in a judicial quagmire. 
• Some high-profile cases have been plodding along for years now.
• Bankruptcy courts have been stormed with realty cases because even a lone homebuyer can file one.
• So far, creditors of a company undergoing insolvency proceedings have been at liberty to negotiate with bidders on a case-to-case basis. This leads to a drama of bids and counter-bids and bank officials are chased leading to litigation. 

What lies ahead – with new proposals

• In case the assets or shares of a bust company are being auctioned, a clear time window would be specified for eligible bidders to place financial bids. 
• Moving to bid online should speed up resolutions. 

What needs to be done

• The tribunals that deal with IBC cases could do with stricter guidelines to distinguish between financial and operational creditors. 
• Secured lenders need to be marked apart from unsecured lenders with greater clarity. 
• Resolution orders should not end up casting the basis on which banks lend money in doubt.