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The Indian Insolvency & Bankruptcy Act, 2016: What is this and how will it affect us?

In current times, bad loans are an issue not only for Indian but also for international creditors. The Indian Insolvency & Bankruptcy Act (IBA), 2015 is a broad, national-level insolvency legislation that covers businesses, partnerships and individuals (entities other than financial firms). Importantly, the IBA creates a formal framework for enabling timely resolution of insolvency issues and liquidation processes and includes insolvency specialists, a regulator, adjudicatory machineries and information services. It also allows creditors to evaluate the feasibility of a borrower for the transaction as well as approve a plan for the transaction’s resumption or a quick liquidation. The approval of this Act has been lauded by the World Bank and the International Monetary Fund. Presently, a government-instituted committee is reviewing the Act’s operations and inviting comments from various stakeholders to understand the factors impeding its smooth implementation.

We feel that it is too early to assess the effect of the IBA. However, we feel that it will trigger a series of positive changes at the social, economic and legal levels in the country. The IBA has the potential of streamlining credit-based processes in the country, thereby benefiting both creditors and lenders. India’s ranking in the World Bank’s index on the ease of doing business also improved (from the 130th Rank in 2016 to the 100th rank in 2017) after the IBA was passed. The presence of provisions in the IBA to deal with cross-border insolvency issues via bilateral treaties and reciprocal agreements with other countries, would greatly improve India’s chances of being a fair trade country. Also, proper implementation of this Act would greatly advance the debt recovery proportions and help rejuvenate the country’s ailing corporate bond markets.

Experts feel that the IBA is bound to bring a change in the dynamics between the debtors and the lenders, who will no longer be at the mercy of the former. The IBA aims at resolving insolvency issues in 270 days, non-resolution after which will lead to the company’s liquidation. Recovery of sick companies by changing their management, an important provision of the Act, will help in the resuscitation of such units. On the contrary, some experts also say that the IBA is very wide and consequently excludes many Indian individuals and companies. It is feared that private equity firms and institutions primarily dealing in distressed assets would not be covered under the Act, consequently reducing recovery rates of such distressed assets. Several experts also feel that the presence of a robust machinery and appropriate implementation of the IBA is an urgent requirement. Small and business owners also feel that their companies are unable to repay credit usually when their clients do not clear their bills. They feel that liquidating their companies, as part of the resolution process under IBA, would be grossly unfair.

In conclusion, the IBA is a step in the right direction towards resolving national and global insolvency issues in the country. However, considering that it is a relatively new legislation, the government must work towards ironing out the weak points in the Act.

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