What Will Be the Impact of Insolvency and Bankruptcy Code on the Indian Economy?

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In India, cases of insolvency in foreign investment had had a long-plagued history until 2015. It only served to mince matters in connection with the settlement of such cases.

However, to simplify matters for foreign investors, the Government of India came up with the idea of bringing in some changes in the early ‘90s. This paved the way for insolvency and bankruptcy code (IBC) after about a decade and a half.

Though the basics of code came into existence in 1992, it could not get its firm structure until 2016. It went through a further transformation to make the Indian economy a foreign direct investment (FDI) friendly economy in two-fold ways.

It came up with the promise to resolve cases of insolvency and bankruptcy for foreign investors quickly and with minimum risks.

Ever since its implementation, one important question that most investors ask to date is how it will impact insolvency and bankruptcy code in India.

This post will dive into the details of it by defining IBC, and all its allied aspects.

What is IBC?

IBC is the acronym for insolvency and bankruptcy code. The need to remove the flawed and obsolete legislation provisions was long due before its inception.

The IBC is a code that seeks to strengthen the resolution of insolvency and bankruptcy cases for both individuals and companies. The latter includes LLPs and business organizations based on partnerships.

Following the appearance of the code, needs-based features replaced the long-standing provisions that threatened to derail bankruptcy law in India.

As a consequence, the following new boards emerged with additional powers and a structured layout:

  •   The Insolvency and Bankruptcy Board of India (IBBI) to look after the resolution of insolvency and bankruptcy cases
  •   The National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT) for the arbitration of LLPs and other companies

While the former is a body, the latter ones serve as the authoritative agencies for arbitration in connection with IPC.

Effects of the IBC Code on the Indian Economy

To better understand how IBC has altered the current situation of the Indian economy, it is necessary to look into how things were before its consolidation.

Before IBC, the existence of various rules and bodies made things difficult for both debtors and creditors. As a result, it was difficult for both parties to make use of their legal rights and options.

Furthermore, it took years, and even decades, to settle cases of insolvency. Things could aggravate if a debtor died before their recovery.

The introduction to the IBC has played a vital role in resolving these problems. Besides, it has also made the process simple and easy for both debtors and creditors in many other ways.

For instance, foreign investors are not afraid of losing their investment anymore. The move has made a positive contribution to bolstering their morale. Due to the welcome change, they have high confidence in the Indian economy.

Here’s how IBC is set to change the image of the Indian economy in their minds:

  •  Investors will be able to invest in the Indian market without the fear of the loss of their investments.
  •  Foreign investors can now plan a long-term strategy to survive in the competitive Indian market.
  •  They will get more time, opportunity, and convenience to identify startups in India that have brighter prospects, and a tremendous potential to grow in the future.
  •  If at any point in time, a company becomes insolvent, IBC will take care of the value of assets. On the part of investors, there cannot be a better choice than the stability in the value of their assets. This becomes all the more important in the event of insolvency of a company in which they invest heavily.
  •  Owing to IBC, investors will find it a lot easier to stay invested in the Indian economy for a long time.

Facts speak for themselves. Surprising, as it may sound, the IBC has helped recover debts worth more than 3 lakh crores in recent years. The recovery of such a huge amount of debt has played a vital role in shaping the Indian economy in a new way. It has further strengthened the fast-growing Indian economy.

Experts believe the IBC has played a major role in boosting India’s ease of doing business rankings across the globe. At present, India occupies the 77th spot on the list of the ease of doing business.

Final thoughts

The IBC has reformed and transformed the outlook towards insolvency cases in India. Among other things, the IBC has provided for a faster means to deal with such cases and build trust in the minds of creditors that they would not lose their wealth.

Top lawyers in India who litigate insolvency cases also agree to the fact that it has provided a professional tool for debtors to deal with the issue of insolvency. While the aforementioned effects are already visible in the Indian economy, experts believe there will be more visible changes in the upcoming years.

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