With the Insolvency and Bankruptcy Board of India (IBBI) becoming operational from this month, the government has done well to move swiftly in its efforts to usher in what is expected to be a radically more efficient way of resolving insolvency. The Insolvency and Bankruptcy Code, which was passed by Parliament six months ago, attempts to redress the failures that plagued previous mechanisms dealing with insolvency. For instance, earlier attempts to deal with bankruptcy often failed to square with the reality that companies would have to shut down. And, that is why the Board for Industrial and Financial Reconstruction and the SARFAESI Act failed to provide solutions to industrial discord. As a result, cases stretched for years: India takes an average of 4.3 years to resolve matters and even after this time the process recovers only about a quarter of the actual value of the stressed assets in question. Not surprisingly, India was ranked a lowly 136 in resolving insolvency in the World Bank’s ease of doing business rankings, far behind its BRICS competitors such as South Africa (41) and China (55).
The IBBI, however, is now putting in place a new architecture that involves consolidation of existing laws and amending them for a time-bound resolution of insolvency. Within two months of a chairman being appointed, the IBBI has, reportedly, already registered 18 insolvency professionals and three insolvency professional agencies. It has also notified four sets of regulations pertaining to the resolution process for companies, insolvency professionals, model bye-laws and the governing board of insolvency professional agencies, and the insolvency professional agencies. Under the emerging architecture, the insolvency professional agencies will be the first level regulators and they will play a role akin to the stock exchanges in the securities market. They will register and regulate insolvency professionals, who will be the key service providers in the new process. In addition to their regulatory role, the insolvency professional agencies will also have the duties of educating professionals, conducting examinations and administering the prescribed code of conduct. Insolvency professionals will work as managing directors of companies that have been declared insolvent and their pay-off will be linked to recovering the most value in the given time. Both these intermediaries will be regulated by the IBBI.
However, contrary to expectations, there are reasons why this new structure will need time before it can yield results. One key area of weakness is the number of insolvency professionals. It is true that thousands of professionals such as chartered accountants, company secretaries, lawyers and cost accountants meet the initial eligibility criteria, however, as of now, only 18 such professionals have registered with the IBBI, even though hundreds are expected to enrol in the first six months. Future enrolments will depend on how the market for such talent develops. The dearth of domain knowledge is made worse by the general lack of awareness about the code and this could further slow down the insolvency process under the new regime. Lastly, the IBBI is still to lay out the framework governing individuals, that is, related to bankruptcies as against insolvencies.