India’s ranking in the World Bank Ease of Doing Business Index improved by another 14 places to 63 in 2019 thanks to a sharp improvement in its ranking in resolving insolvency, one of the seven indicators used to build the index.
In resolving insolvency, India ranking jumped 56 places to 52 in 2019 from 108 in last year. The credit for this goes to the Insolvency and Bankruptcy Code (IBC), which came into force in 2016.
In three years, 21,000 cases were referred to the National Company Law tribunal (NCLT), the adjudicating authority under the IBC. Out of 21,000 cases, 10,000 have been settled — 8,500 cases settled prior to admission and 1,500 cases were settled through resolution or liquidation. The rest of the cases are at different stages of insolvency.
So far close to 150 cases have been resolved and 600 companies have been ordered to liquidate. Close to 300 cases have been withdrawn or rejected by the NCLT.
Before IBC, the recovery (of debt) rate was around 26% and the time taken for closure of the case was over four years. IBC has changed this. Now the average recovery rate is 43% in case of financial creditors and 49% in case of operational creditors. The time average time taken under IBC is 1.6 years compared to 4.3 years earlier. In the earlier resolution regime, the cost of the resolution was 9%, which has come down to 1% post IBC.
In order to further expedite the insolvency process, the government is now looking to iron out some of the issues facing IBC. Like the government is now considering only large cases should go to NCLT for resolution through IBC process. For smaller cases, it is trying to create an alternative mechanism for resolution. It is also planning some kind of threshold, especially for class borrowers like home and debenture buyers, so that a single borrower does not drag an operating company into rigmarole of insolvency process.
The government is now planning to increase the scope of IBC and is planning to roll out personal insolvency law. The rollout would be in phases. In the first phase, personal guarantor to a corporate debtor would be covered. Next could be a fresh start process, which is basically giving relief to very small borrowers who are not in a position to repay debt. After that the government will implement the insolvency law proprietorship, partnerships and others.
Source: Business Today, October 24, 2019