How To Fix An Ailing IBC

Context: Clogging of Insolvency and Bankruptcy code (IBC) requires serious revamping through various measures.

Issues associated with IBC

• Filing for bankruptcy can be initiated only after default: Voluntary bankruptcy filing shall be facilitated.
• Resolution professionals (RPs) are not effectively performing: Institutional framework to keep their conduct proper is missing.
  • Doubts of collusion between the RP and the bidder who put in a bid just above the liquidation value of the company.
• Under-developed debt market: India doesn’t have developed and deep pocketed corporate debt market. There is lack of competition among potential buyers for resolved assets.
  • Asset reconstruction companies (ARCs) created under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act 2002 lacks capital and managerial bandwidth to run the companies they buy.
• Information depositaries yet to materialise: As per original IBC, Information depositories were supposed to come out with all the relevant data on companies. This scheme is yet to be materialised.
• Issues in valuation: How much the assets of a company are worth is often vague, and there is little to prevent company managements or RPs from siphoning value out of a company.

Way forward

• Strengthen institutional framework: Put in place an institutional framework for creating an inventory of a company’s assets involving employees and keep RPs accountable.
  • Whistle-blowers must be protected and rewarded.
  • Liquidation value not to be kept secret: All relevant information shall be made accessible for bidders.
• Strengthen ARCs: Allow then issue bonds to raise the money they need and bring them out of RBIs strings.