The Insolvency and Bankruptcy Code, 2016 (Code) stands as the cornerstone legislation governing the insolvency resolution process for corporate entities, partnerships, and individuals. Representing a significant departure from India’s previous insolvency framework, the Code is lauded for its innovative design and structure, aiming to maximize the value of assets belonging to corporate debtors while safeguarding the interests of all involved stakeholders. The objective of Insolvency and Bankruptcy Code 2016 to foster a resilient stressed asset market and facilitate dignified exits for genuine business failures has yielded commendable results since its inception.
Undergoing six amendments to date, the Code has reached institutional milestones, instilling a sense of optimism and confidence among stakeholders. Its adaptability to evolving market dynamics and changing realities underscores its status as a dynamic and progressive legal framework, embodying the concept of a ‘living law’.
How did the IBC come into existence?
In response to a series of suboptimal insolvency laws, the Government introduced the Insolvency and Bankruptcy Code, 2016 (IBC/ Code) in 2016, heralding it as the third pillar of economic freedom—the freedom to exit. This landmark legislation revolutionized the insolvency resolution landscape for corporate entities, partnership firms, and individuals by institutionalizing a time-bound mechanism aimed at maximizing the value of their assets. While promoting entrepreneurship and facilitating access to credit, the Code also prioritizes the interests of all stakeholders involved.
Recognized as one of the most important economic legislations in recent times, the IBC has played a pivotal role in enhancing India’s business environment. The IBC swiftly emerged as the go-to solution for resolving stressed assets, reshaping creditor-debtor relationships, and fostering a healthier credit culture within the economy. Evolving alongside market dynamics, the Code has undergone revisions to deepen its impact and maturity. It promotes collective efforts to revive viable firms while facilitating smooth exits when necessary, prioritizing resource optimization through either resolution or liquidation. Market-driven processes under the Code empower the commercial wisdom of the committee of creditors, with liquidation being considered a last resort.
Success rate
In the Insolvency and Bankruptcy Board of India Statistical Report (June 2023), the data reveals significant insights into the status of Corporate Insolvency Resolution Processes (CIRPs). Among the 6,529 CIRPs initiated, 5,189 have been closed, with 691 (13.3%) being successfully resolved, 1,737 (33.5%) liquidated, and 905 (17.4%) closed on appeal, review, or settlement, leaving 1,856 (35.8%) cases ongoing. The overall resolution rate, including resolved and settled cases, has seen a slight increase to 30.7%, with the success rate for reviving companies (resolved cases) standing at 13.3%. Despite this, the liquidation rate remains high at 33.5%. Ongoing cases have decreased slightly, while appeal, review, or settled cases have increased, necessitating further monitoring. It’s noteworthy that while the average time for CIRP completion has shown improvement, there’s still room for expediting resolutions. Concerns persist regarding varying success rates across sectors and company sizes. The Insolvency and Bankruptcy Code continues to evolve, with amendments made based on observations and experiences, signaling a commitment to refining the insolvency resolution process further.
Scope for Asset Reconstruction Companies under the IBC, 2016
The Insolvency and Bankruptcy Code (IBC), 2016, presents both opportunities and challenges for Asset Reconstruction Companies (ARCs) in India.
One significant advantage is the increased access to distressed assets. IBC provides a streamlined framework for resolving insolvency, potentially leading to a larger pool of distressed assets available for ARCs to acquire. This allows them to expand their portfolio and invest in potentially profitable opportunities. Moreover, IBC aims to maximize value for creditors, aligning with ARCs’ objectives. Faster resolution processes under IBC can lead to quicker realization of asset value, potentially improving ARCs’ recovery rates. Additionally, the legal framework provided by IBC clarifies processes and timelines for resolution, reducing uncertainties and providing greater predictability for ARCs when investing in distressed assets.
Further, from October 2022, ARCs can participate as resolution applicants under IBC, allowing them to propose revival plans and potentially acquire stressed companies as ongoing concerns. This expands their scope beyond acquiring and recovering assets. Leveraging their expertise in asset valuation, restructuring, and debt recovery, ARCs can play a crucial role in formulating and implementing resolution plans under the IBC, potentially increasing their involvement and earning fees. Additionally, ARCs can collaborate with financial institutions, creditors, and resolution professionals under the IBC, creating new business opportunities and partnerships.
However, challenges also exist. Increased participation of other resolution applicants, including foreign investors, can intensify competition for distressed assets, potentially driving up acquisition costs for ARCs. Some ARCs might face limitations in raising capital, hindering their ability to participate in large-scale resolutions. Moreover, compliance with additional regulations and reporting requirements under the IBC increases operational complexity and costs for ARCs. Also, IBC resolution processes can be complex and uncertain, impacting the final value recovered by ARCs.
Conclusion
Enabling Asset Reconstruction Companies (ARCs) to bid as resolution applicants can leverage their expertise in managing distressed companies, potentially leading to quicker and more effective resolutions for defaulted firms. ARCs are known for offering higher recovery rates with minimal cuts to creditors compared to other applicants. This is attributed to their profound understanding of distressed asset valuation and their ability to implement turnaround strategies effectively. Allowing ARCs to participate as resolution applicants can thus result in enhanced recovery outcomes for creditors. Conversely, the inclusion of ARCs in the bidding process may intensify competition for distressed companies, ultimately driving better pricing for such entities.
The involvement of prominent ARCs in the resolution process is expected to enhance the overall responsiveness of the resolution landscape, given their adeptness in managing and revitalizing non-performing assets. Nevertheless, the success of this initiative hinges significantly on the policies formulated by each ARC, particularly concerning sectoral exposure limits. Essentially, the effectiveness of allowing ARCs as resolution applicants will be contingent upon the specific policies and procedures they implement, including their sectoral focus and risk appetite. These policies will play a pivotal role in shaping the level of competition, speed, and efficacy of the resolution process.
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FAQs:
1. Why is allowing Asset Reconstruction Companies (ARCs) to bid as resolution applicants considered advantageous?
Enabling ARCs to participate as resolution applicants leverages their expertise in managing distressed companies, potentially leading to quicker and more effective resolutions. ARCs typically offer higher recovery rates with minimal haircuts to creditors compared to other applicants. This is attributed to their profound understanding of distressed asset valuation and their ability to implement turnaround strategies effectively, resulting in enhanced recovery outcomes for creditors.
2. How might the inclusion of ARCs as resolution applicants impact competition in the market for distressed companies?
The inclusion of ARCs in the bidding process may intensify competition for distressed companies, ultimately driving better pricing for such entities. Allowing ARCs to compete as resolution applicants, it opens up the bidding process to more players with specialized expertise in managing distressed assets. This increased competition can lead to improved pricing and better outcomes for creditors.
3. What role do ARCs play in the resolution process, and how does their involvement benefit creditors?
ARCs play a crucial role in managing and revitalizing non-performing assets, bringing expertise and resources to the resolution process. Their adeptness in managing distressed companies can result in quicker and more effective resolutions, ultimately leading to higher recovery rates for creditors. ARCs typically have a better understanding of the value of distressed assets and can offer higher bids based on their ability to turn around such assets, benefiting creditors in the process.
4. What factors contribute to the success of allowing ARCs to bid as resolution applicants?
The success of allowing ARCs as resolution applicants depends significantly on the policies formulated by each ARC, particularly concerning sectoral exposure limits. The effectiveness of this initiative hinges on the specific policies and procedures implemented by ARCs, including their sectoral focus and risk appetite. These policies play a pivotal role in shaping the level of competition, speed, and efficacy of the resolution process, ultimately determining its success.
