India Leapfrogs to Bankruptcy Reform

At a recent Chazen Institute’s recent symposium in Mumbai, Shri Injeti Srinivas, Secretary to the Ministry of Corporate Affairs, offered a vehement defense of the recent Insolvency and Bankruptcy Code — a law that will make the country an easier and more attractive place to do business. Below is an excerpt of his remarks.

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“Any law faces a three-pronged test to determine if it is successful: Is the law a better standard than what came before? How well can the law be implemented? Does it impact behavior?

“We now have just a year of outcomes to look back on and, as with any major reform, the strength of the resolve and the underlying commitment regarding the Insolvency and Bankruptcy Code (IBC) of 2016 is still being tested. But by any measure, this very modern insolvency framework passes the litmus test. The Act is definitely an improvement over previous laws that solely favored the creditor. It is quickly being implemented with, as of last November, more than 260 liquidations and 66 resolutions reported.

“India proved that we don’t believe in an incremental approach to creating a bankruptcy statute. We want to leapfrog to be among the best in the world.

“We have realistic expectations. Many issues still have to be accepted and clarified, and the country’s institutions will have to mature.

“Some of the key intents of the IBC are crystalizing:

  • You cannot have an easier process. Any creditor can trigger a bankruptcy investigation. Insolvency is not a balance sheet test. Inability to pay debts is sufficient. It’s an onerous responsibility. The debtor has to be promptly paid.
  • The Act protects the borrower’s ability to operate while the proceedings play out. Whatever contracts needed for a company to be a going concern must be maintained. Whatever contracts that are burdensome or excessively skewed can be dismissed.
  • Still, the balance of power has shifted from the previous regime, in which the borrower remained in control of operations. Financial creditors are in charge— shareholders had their day and cannot exercise any approval rights over a resolution plan. [Although they are entitled to the same liquidation value,] operational creditors also cannot participate in drafting the plan.
    The exclusion of operational creditors from the resolution plan is seen as a deficiency of our system. But the preamble of the law says the intent is to maximize the value of assets for all [parties]. In the 66 cases that have been resolved, operational creditors have recovered 47 percent of their claims, and financial creditors have received 45 percent. This framework provides a better chance of recovery for all.
  • The process is timely. Once the plan is approved, you have 180 days to right the situation. But on day 181 you have to come to IBC.

“Even though the value of liquidations is currently five times that of resolutions, we expect to see more successful resolutions as debtors wade through the backlog.

“ In fact, the biggest story that’s not captured by the statistics is that the lending and borrowing culture in India is changing. We are seeing mediations between debtors and lenders. An estimated 4,500 cases have been settled by mediation compared to 66 reported resolutions. This dispute settlement is happening outside the system.

“Establishing a pathway to bankruptcy that provides transparency, competition and rigor to the process makes doing business in India more binding.”

Shri Injeti Srinivas is Secretary at the Ministry of Corporate Affairs. A 1983 batch IAS officer from Odisha cadre, Srinivas was previously secretary at the Department of Sports as well as Director General of Sports Authority of India (SAI). Srinivas is a graduate in Economics and has a Masters in Business Administration. Among other roles, he has served as development advisor of UNDP and as chairman of Odisha State Financial Corporation.

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