Patience with the IBC

Time to reform will be after behavioural changes

Speaking at a function organised to mark the second anniversary of the Insolvency and Bankruptcy Code, or IBC, Union Finance Minister Arun Jaitley defended the integrity of the process and suggested that any major changes to it should wait until the initial rush of bankruptcies had died down. While agreeing that there may be a useful combination of court-approved bankruptcies and out-of-court settlements, which would be an optimal use of resources, Mr Jaitley correctly pointed out that the initial years of the IBC were important to demonstrate that the legal system would no longer allow too much leeway to delinquent borrowers. After several cases had run through the system and precedents established, then there would, hopefully, be a change in incentives and, thus, in the behaviour of lenders and borrowers. That would be the appropriate time to see what out-of-court settlements would fit in with the IBC.

After all, as Mr Jaitley pointed out, there has been no dearth of possible forms of out-of-court settlement procedures in past years. Few of them were effective. Most tied up capital for too long, or were used as sophisticated ways of concealing problematic “extend and pretend” behaviour. Earlier this year, the Reserve Bank of India (RBI) essentially put an end to all such schemes and ensured that the IBC would be immediately and compulsorily invoked in the case of delinquent loans. Returning to other schemes now would not just undermine the RBI but also the IBC. There are currently over 800 cases making their way through the insolvency process, and more than half of them have not gone through even the initial 180-day period. Thus, in some sense, the National Company Law Tribunal (NCLT) is indeed going through an unusual period in which the entire bottled-up demand for insolvency has to be met. It is far from clear what the regular rate of bankruptcies will be and if the NCLT will need more capacity in order to deal with it.

The immediate impetus for Mr Jaitley’s intervention was a paper by the former chief economic advisor to the Ministry of Finance and former governor of the Reserve Bank of India, Raghuram Rajan, on the bankruptcy process. The paper was released as part of an economic agenda for the next five years by Mr Rajan and several of his colleagues. Mr Rajan had argued that the NCLT was being “overwhelmed” and should ideally be reserved for only the largest cases. His point is well taken. Indeed, in a well-functioning system only the most intractable or the most valuable cases should go to court. The others could be settled without excessive utilisation of judicial capacity. However, it would be unwise to suppose that India has reached the point of such maturity in its system. That will only come with behavioural change and precedent. The threat that every case could go to court has to be credible if in the end only the most important cases are to go to court. The finance minister is right to advise that any modifications to the IBC process will best be made only after the initial rush is completed.