India had ‘socialism without entry’ before economic liberalization in the early 1990s. This had a negative impact on the economy and gave ‘Hindu rate of growth’ to the country. The problem was solved in the early 1990s as the country moved towards a capitalist economy with the advent of economic liberalization. However, the larger framework of the political economy of the country remained ‘capitalism without exit’. The lack of a proper framework for insolvency amassed huge Non-Performing Assets (NPAs) which hampered the health of the banking sector as well as the growth of the economy. Modi government brought path-breaking policy as an Insolvency and Bankruptcy Code (IBC) to solve capitalism without exit problem.
According to an analysis published by Sapan Gupta of Shardul Amarchand Mangaldas & Co law firm, Insolvency and Bankruptcy Code (IBC) has saved four lakh jobs. Under the new insolvency regime, 88 cases have been solved so far. “Under the insolvency regime, a total of 88 cases have been resolved so far, securing revenue of Rs 31,651 crore, with employee salaries of around Rs 2,350 crore,” wrote Sapan Gupta. “At an estimated average salary of Rs 30,000 a month per person, this translates to a direct employment of 65,250. Then there are jobs of vendor partners, sales outfits, housekeeping contracts, transporting contracts and security services. Recent analyses by human resource firms show that one direct employee in a company creates five more jobs outside,” he added.
So far, more than 1,000 professionals have registered under IBC regime and it is proving moderately successful in solving the corporate bankruptcy. Before the implementation of IBC in 2016, all the previous steps of corporate insolvency like the Board for Industrial and Financial Reconstruction (BIFR) under SICA (Sick Industrial Companies Act 1985), Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (also known as the SARFAESI Act) and various rules framed ruled by RBI failed.
According to corporate affairs secretary Injeti Srinivas, 3 trillion rupees have been recovered so far in two years due to implementation IBC. 3500 cases with default around INR 1.2 trillion rupees was withdrawn from NCLT because creditors recovered money by threatening the debtors about going through IBC. However, the pace of resolution under IBC is still slow despite the fact that law has put time constraint. “The two major challenges facing the NCLT process are clogged pipelines and the unsuitability of the method for some classes of stressed assets, especially power and small and medium enterprises (SMEs). At current clearance rates, resolving the whole NPA problem could take another six years or so,” wrote former Chief Economic Advisor Arvind Subramanian in his book ‘Of Counsel’: The Challenges of Modi-Jaitley Economy.
The Insolvency and Bankruptcy Code (IBC) is proving to be the most powerful weapon against the NPA problem, even the Economic Survey 2018 mentioned that the new Insolvency and Bankruptcy code (IBC) was helping to improve the health of banking sector. Earlier several Indian companies were defaulting on their loans intensely because initially there was no law to dissolve their companies. The promoters were sure that the management of the company will not go out of their hands. They were taking loans from the government banks by bribing the employees with the intention of never returning the loans back. Since India brought the Insolvency and Bankruptcy Code, companies are now running after the banks to pay back their dues, because the IBC rules barred promoters of companies that are classified as non-performing assets (NPAs) from bidding for these companies.