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India’s New Era in Insolvency – How the World Sees It

India’s insolvency process

At a time when the opposition is trying hard to push a narrative that the business eco-system is in dire situations and banks are in dismal position, the World Bank’s Ease of Doing Business report 2020 duly lays focus on India’s insolvency process and explains how it is playing a crucial role in bringing ease in the business. In our earlier articles, we have explained how the NPA mess in banking is the creation of the UPA government and how various measures including the Insolvency and Bankruptcy law have been effectively addressing the issue.

It is common sense that the lack of a proper resolution process in any business causes stress on banks, creditors and also the firm that is unable to pay back. This vicious circle needs to be broken at some point and India is achieving it by introducing the resolution process in 2016. The World Bank’s Ease of Doing Business report 2020 has recognised it duly and spent a considerable space in the booklet to acknowledge the India model of insolvency resolution.

The Importance EODB Report Gives to Insolvency Procedure

The report notes, “since Doing Business 2006, more than 40 economies have adopted reforms implementing or strengthening reorganization procedures to resolve insolvency. Having reorganization procedures reduces failure rates of small and medium-size enterprises and prevents the liquidation of insolvent but viable businesses.

In 2018/19, 115 economies implemented 294 business regulatory reforms across the 10 areas measured by Doing Business. Most of these reforms addressed aspects of starting a business, dealing with construction permits, getting electricity, and paying taxes; the least reformed area was resolving insolvency.”

How India Performed in This Least Reformed Area

The World Bank’s EODB report 2020 notes that “the case of India provides an example of successful implementation of reorganization procedures.” Then it goes on to acknowledge these salient features related to India’s Insolvency process.

  • Before the implementation of the insolvency reform in 2016, it was very burdensome for secured creditors to seize companies in default of their loans.
  • The very lengthy and burdensome foreclosure proceedings that lasted almost five years, making efficient recovery almost impossible.
  • With the reorganization procedure available, companies have effective tools to restore financial viability, and creditors have access to better tools to successfully negotiate and have greater chances to revert the money loaned at the end of insolvency proceedings.
  • The report points out, “since its implementation, more than 2,000 companies have used the new law. Of these, about 470 have commenced liquidation and more than 120 have approved reorganization plans.”
  • Despite some challenges in the implementation of the reform, the number of reorganizations in India has been gradually increasing.
  • Overall recovery rate has improved from 27 to 72 cents on the dollar.

UPA had left both the banking sector and the corporate sector in a mess. The Insolvency and Bankruptcy Code implemented by the NDA government has addressed both the sectors without any fear or favour. As the World Bank report itself asserts, the insolvency process is conducive for any economy to facilitate a transparent business eco-system. In this context, India’s implementation of insolvency law is not a cosmetic change but a structural reform that will energise the business and finance sectors in the days to come.

The world has taken note of it. It is time for those who still ask ‘where are the structural reforms’ also to take note.