Impact of Insolvency - It has been highlighted that an economy to be competitive needs free entry and free exit of companies. In the past, in the absence of an exit mechanism, several private sector companies were nationalized. The relationship ensured that the promoters would not exit companies irrespective of their performance and conduct. However, this has changed with the implementation of the Insolvency and Bankruptcy Code, 2016 (Code). The Code will have a positive impact on GDP in the long term, though there may be some short terms pains, including growth costs, he said.
The success of the Code to a large extent depends upon the functioning of and processes adopted by the Adjudicating Authorities. Competency, conduct, and integrity of the Insolvency Professionals will also be chief determinant in harnessing the full benefits of the Code. The unprecedented speed is appreciated at which the Code was envisioned, enacted and implemented. Bankruptcy Law Reforms Committee (BLRC) made a paradigm shift to ‘creditor in control’ from the ‘debtor in possession’ model, which would decrease the ex-ante cost of capital ex-ante.
Value preservation of assets of the corporate debtor is rightly set as the first-order goal under the Code and the innovation in the form of Information Utility will effectively help reduce information asymmetry. While recovering 43% of their claims through resolution plans, the creditors have recovered 210% of the liquidation value of the companies. They effectively got a bonus of 110% because of the Code. The creditors have realized about Rs.1.6 lakh crore through a resolution plan of 160 companies.
They are realizing through settlements after applications are filed and before they are admitted, on account of the Code. It is important to consider what happens under the Code, what happens on account of the Code and what happens in the shadow of the Code to appreciate the full outcome from the Code. Recovery is only a by-product of the rescue of the companies. One-third of the companies which have been resolved were in Board for Industrial and Financial Reconstruction (BIFR) or not going concerns. The balance two-third companies were in distress, some of them having deep distress. The Code rescued them from premature death.
The Code promotes entrepreneurship, availability of credit and utilization of resources, and consequently would push up GDP growth by a few percentage points. The Code will promote the corporate bond market in India, he pointed out. Moreover, SEBI has facilitated the implementation of the Code in terms of carve-outs under takeover and listing regulations. The road ahead should include cross border insolvency, group insolvency, the rollout of individual insolvency, insolvency of financial service providers among others.
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