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Tuesday, August 14, 2018

An annotated reading list on the Indian bankruptcy reform, 2018

by Rajeswari Sengupta and Anjali Sharma.

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted two years back and its provisions for corporate persons have been operational for over eighteen months now. In this post we put together a compilation of writings on the Indian bankruptcy reform surrounding the IBC. We have categorised the articles and papers in themes that broadly reflect the evolution of the IBC reform process from its inception to its current status.

  • Problems in the pre-IBC framework.
  • The outcomes of a weak recovery and resolution framework
  • The IBC design and institutional framework
  • From design to law, and expectations from the new law
  • Unfolding of IBC implementation
  • The way forward on the reform agenda

Problems in pre-IBC framework

Corporate Rescue in India: The Influence of the Courts by Kristin van Zweiten, July 1, 2014. The corporate rescue framework under the Sick Industrial Companies Act (SICA, 1985) was slow and costly. Its provisions were interpreted and reinterpreted by judges in attempts to rescue companies destined for liquidation, mainly to protect the interests of workmen and employees.
The evolution of the corporate bankruptcy law in India by Nimrit Kang and Nitin Nayar, 2004. Prior to IBC, there was no single, comprehensive and integrated law on corporate bankruptcy in India. Liquidation and reorganisation were costly in terms of time and resources, did not encourage optimal valuation outcomes, and created incentives in favour of private benefits at the cost of firm value.
Evolution of the insolvency framework for non-financial firms in India by Rajeswari Sengupta, Anjali Sharma and Susan Thomas, June 22, 2016. The origin of the complex and fragmented framework for resolution and recovery can be traced back to its evolution. Over the years, policy adopted a piecemeal approach to reform, solving only a part of the complex problem, one at a time. This led to inefficient outcomes on the overall objective.
Inconsistencies and forum shopping in the Indian bankruptcy process by Aparna Ravi, November 12, 2015. Also see here. Fragmentation of laws and adjudication fora was a key factor resulting in delays and poor bankruptcy outcomes. A new unified bankruptcy code is an opportunity to reverse this trend by providing a linear and time bound mechanism for collective insolvency resolution.
Concerns about RBI's 'Strategic Debt Restructuring Scheme' by Ajay Shah, June 26, 2015. Restructuring mechanisms initiated by the Reserve Bank of India lacked legal foundation and sound economic thinking.
The Scheme of Arrangement as a Debt Restructuring Tool in India: Problems and Prospects by Umakanth Varottil, March, 2017. Scheme of Arrangements under the Companies Act is used sparingly for debt restructuring in India. The mere presence of a legal provision does not lead to its utilisation. The context and the associated institutions play a role in determining how such legal provisions are used.

The outcomes of a weak recovery and resolution framework

NPAs processed by asset reconstruction companies -- where did we go wrong? by Ajay Shah, Anjali Sharma, Susan Thomas, August 23, 2014. Asset Reconstruction Companies (ARCs) were not functioning well, despite their mandate under the secured credit law. Their ability to realise value was limited by an inefficient legal framework for bankruptcy. ARCs become a tool for delaying recognition of stress in bank balance sheets.
Methods for measurement of delays in the bankruptcy process by Dhananjay Ghei and Shubho Roy, November 25, 2016. Delays in the bankruptcy process destroy commercial value. Empirical research work in this field is now being conducted using state of the art techniques.
Building a better credit market by Bhargavi Zaveri and Radhika Pandey, March 12, 2016 India lacks a deep and well functioning credit market. Secured loans given by banks dominate the credit landscape. A comprehensive bankruptcy law is an important institutional reform required to fix this problem.
Are Indian banks systematically mispricing risk? by Harsh Vardhan, January 2, 2015. There is a systematic mis-pricing of corporate credit by banks. This impacts effective allocation of capital in the economy and could be a potential reason behind the recurring non-performing assets (NPA) crisis in Indian banking.
Balance sheet problems of the firms and the banks by Ajay Shah, July 25, 2015. Also see here. The credit boom of 2003-2008 was followed by a period of economic slowdown in the aftermath of the great financial crisis. Banks and their corporate borrowers faced significant balance sheet difficulties. This twin balance sheet crisis was aggravated by undercapitalisation of public sector banks, deficiencies in banking supervision and regulation, and the lack of a working bankruptcy regime.
Selective default on corporate bonds by Ajay Shah and Bhargavi Zaveri, October 25, 2015. Fragmented creditor rights enabled firms to selectively default on the claims of creditors that had weak legal protection.

The IBC design and institutional framework

Dealing With Failure by Susan Thomas, November 13, 2015. The design of the IBC can have a likely impact on the state of credit market development and entrepreneurship in India.
Firm insolvency process: Lessons from a cross-country comparison by Anjali Sharma and Rajeswari Sengupta, December 22, 2015. A review of the UK and Singapore corporate insolvency rameworks offered valuable lessons for reform of the Indian orporate insolvency resolution regime.
Personal insolvency: Lessons from the UK and Australia by Renuka Sane, December 28, 2015. A review of the UK and Australian personal insolvency frameworks offered valuable lessons for reform of the Indian ersonal insolvency resolution regime.
Setting up the ecosystem for personal credit by Renuka Sane, November 21, 2015. Also see here. A well functioning market for personal credit requires the presence of a machinery that deals with default. The draft IBC provisions on personal credit sought to address this objective.
A better bankruptcy regulator by Pratik Datta and Rajeswari Sengupta, January 9, 2016. Also see here. IBC proposed setting up a bankruptcy regulator, the Insolvency and Bankruptcy Board of India (IBBI), who will function like a mini-state in regulating insolvency professionals (IPs), IP agencies, information utilities (IUs) and the resolution procedures.
How to make courts work? by Pratik Datta and Ajay Shah, February 22, 2015. Well functioning courts are an essential ingredient of the bankruptcy reform process. This requires a complete overhaul of the underlying judicial infrastructure and procedures and ground-up reforms.
Understanding judicial delays in India by Prasanth Regy, Shubho Roy and Renuka Sane, May 18, 2016. A better understanding of the causes of judicial delays is required in order to build judicial capacity and design better functioning courts.
Building the institution of Insolvency Practitioners in India by Anirudh Burman, December 25, 2015. Also see here and here. A new cadre of regulated insolvency professionals play a critical role in IBC proceedings. A model of 'regulated self regulation' would enable the development of a market for these professionals, while ensuring that they are effectively regulated.
Ensuring information access during financial distress by Anjali Sharma, Shivangi Tyagi and Shreya Garg, December 17, 2015. Also see here and here. Access to indisputable information about the claims on the debtor reduces information asymmetry. The IBC proposed a competitive industry of entities called Information Utilities IUs) to maintain credit records for access during IBC proceedings.
Land market reform is an important enabler of bankruptcy reform by K.P. Krishnan, Venkatesh Panchapagesan and Madalasa Venkataraman, January 31, 2016. Collateral plays an important role in the credit usiness. Land and real estate constitute a large part of this collateral in India. Improved working of the land market is therefore crucial for effective functioning of IBC.

From design to law, and expectations from the new law

BLRC hands over the draft Insolvency and Bankruptcy Bill November 4, 2015. The Ministry of Finance published the report of the Bankruptcy Law Reforms Committee (BLRC) and the draft law for public consultation.
Insolvency and Bankruptcy Bill was tabled in Parliament today December 21, 2015. The legislative process for the IBC started.
Indian bankruptcy reforms: Where we are and where we go next by Ajay Shah and Susan Thomas, May 18, 2016. When IBC was finally enacted on May 28, 2016, there were many open questions about the state of Indian bankruptcy reforms.
Bankruptcy reforms: It's not the ranking that matters by Rajeswari Sengupta, November 13, 2015. The expectation that IBC would improve India's rank in the World Bank's Ease of Doing Business Report seemed to be a key driver of the pace of reform.
How will IBC 2016 deal with existing bank NPAs? by Rajeswari Sengupta and Anjali Sharma, December 5, 2016. Also see here. By the time of its implementation in December 2016, policy discourse was positioning the IBC as a mechanism to solve the bank NPA problem. The actual scenario was much more complex than this.

Unfolding of IBC implementation

An unsettling precedent under the IBC By Gausia Shaikh and Bhargavi Zaveri, Augist 8, 2017. An early Supreme Court judgment was not aligned with the design principles of the IBC.
Understanding the recent Banking Regulation (Amendment) Ordinance, 2017 by Pratik Datta and Rajeswari Sengupta, May 8, 2017. Also see here. In May, 2017, government amended the Banking Regulation Act, enabling RBI to direct banks to refer cases to IBC.
Essar Steel v. RBI: What lies ahead? by Pratik Datta, July 6, 2017. RBI identified 12 cases for IBC referral. One of the 12 companies, Essar Steel challenged the constitutionality of RBI's actions. Supreme Court upheld constitutionality while expressing concern over the RBI process.
Jaypee: consumer angle in IBC play by Aparna Ravi and Anjali Sharma, September 18, 2017. Also see here. IBC categorised creditors into financial and operational creditors. The question about classification of home buyers as creditors came up in the Jaypee Infratech case.
Concerns about the Indian bankruptcy reform by Ajay Shah, March 25, 2018. The Binani Cements case raised concerns about the actions of resolution applicants affecting the timeliness of the resolution process under IBC.
Don't rush to ban promoters from the IBC process by Adam Feibelman and Renuka Sane, November 17, 2017. Also see here. As the cases moved along, one major concern in public discourse was about permitting the promoters to re-gain control of their insolvent firms.
Understanding the recent IBC (Amendment) Ordinance, 2017 by Rajeswari Sengupta and Anjali Sharma, December 7, 2017. The government amended the IBC in December, 2017 to introduce disqualifications for promoters and their related parties.
Sequencing issues in building jurisprudence: the problems of large bankruptcy cases by Ajay Shah, July 7, 2018. Also see here. State capacity building requires sequencing, where the ecosystem learns to deal with simple things before taking on the complex problems. The Banking Regulation Amendment Ordinance of 2017, reversed this trend, bringing the 12 largest cases to a nascent law. This may have an impact on the sustainability of the IBC reform process.
Judicial Procedures will make or break the Insolvency and Bankruptcy Code by Pratik Datta and Prasanth Regy, January 24, 2017. Also see here and here. Judicial procedure and judicial interpretation of IBC provisions in respect of specific cases has altered the design elements of the law.
A Limiting Principle for the NCLT's New Powers Under the IBC by Adam Feibelman, by August 1, 2018.
The IBC Amendment Act, 2018 gives the NCLT the power to reject a plan approved by creditors in the IBC process. This raises concerns about judicial interventions in commercial decisions.
The proper purpose of insolvency law by Pratik Datta and Rajeswari Sengupta, May 6, 2018. The use of IBC to fulfill non-bankruptcy policy objectives may impact the effectiveness of the law in fulfilling its primary objective of timely resolution based on commercial decision making.
Watching India's insolvency reforms: a new dataset of insolvency cases by Sreyan Chatterjee, Gausia Shaikh and Bhargavi Zaveri, August 30, 2017. Also see here and here. There is a need to capture data to enable empirical analysis of the working of the IBC. The Finance research Group at IGIDR has put together a dataset of NCLT orders which helps understand the admission procedure and outcomes.
The Indian bankruptcy reform: The state of the art, 2017 by Ajay Shah and Susan Thomas, July 13, 2017. One year from the enactment of the law, several of the old questions remained unanswered and new areas of concern also cropped up. The need of the hour is the intellectual capacity to identify the problems, and come up with solutions so as to move closer to the ultimate desired outcome of IBC-high recovery rates.

The way forward on the reform agenda

Building institutional capacity

Does the NCLT Have Enough Judges? by Devendra Damle and Prasanth Regy, April 6, 2017. Adjudication capacity needs to keep pace with the growing case-load in order to meet the prescribed timelines in IBC.
Issues with the regulation of Information Utilities by Sumant Prashant, Prasanth Regy, Renuka Sane, Anjali Sharma, and Shivangi Tyagi, July 12, 2017. Also see here. IU regulations need review to ensure that a competitive industry of IUs come up. So far this is a missing piece in the institutional infrastructure.
Building State capacity for regulation in India by Shubho Roy, Ajay Shah, B. N. Srikrishna, Somasekhar Sundaresan, July 17, 2018.
This paper provides a conceptual framework for building state capacity in regulation in India which is a key institutional element in the IBC reform process.

Cohesive action on the reform agenda

Disclosure of default: The present SEBI disclosure regulation is adequate by Ajay Shah and Bhargavi Zaveri, January 11, 2018. Also see here. Disclosure of default enables early identification of stress, and prevents value destruction. The disclosure principles applicable to listed firms need to be enforced effectively to facilitate disclosure of defaults by listed companies, and of stressed assets by listed creditors.
RBI's proposal for a Public Credit Registry by Prasanth Regy, August 2, 2017. IUs, envisaged as credit information infrastructure institutions under the IBC, initially received RBI support. The RBI subsequently proposed setting up a public credit registry, which is on a parallel track to the IU concept of IBC.
Analysis of the recent proposed SARFAESI amendments: are these consistent with the Insolvency and Bankruptcy Code? by Rajeswari Sengupta and Richa Roy, May 29, 2016. The design of the newly implemented debt recovery law, which came after IBC, continues to be at variance with the IBC principle of a comprehensive law accessible to all creditors.

The missing pieces

Anticipating India's New Personal Insolvency and Bankruptcy Regime by Adam Feibelman, January 11, 2018. Also see here and here. The individual insolvency provisions of IBC are yet to be notified. The implementation of these provisions, will require significant preparation from stakeholders in terms of the design and capacity of institutional elements.
Cross Border Insolvency and the Indian Bankruptcy Code by Aparna Ravi, May 14, 2016. A framework for cross border insolvency based on the principles on international cooperation needs to be put in place.
Movement on the law for Resolution Corporation by Suyash Rai, June 19, 2017. A resolution framework for financial firms is the logical next step to the IBC, towards addressing the twin balance sheet problem.


Rajeswari Sengupta and Anjali Sharma are researchers at Indira Gandhi Institute of Development Research, Mumbai. The authors would like to thank the original authors of all the articles in this compilation.

This annotated reading list is open to collaborative development. If you have an article or paper that you think will enrich this list, please place it as a comment to this article and we will review it for inclusion.

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