The liberalization reforms of
1990’s dismantled the license-quota raj and removed the barriers to start a new
business. But one of the key measures to encourage business is the freedom to
exit. As per World Bank reports, the amount of time taken to complete the
bankruptcy process in India averages around 4.3 years in comparison to 0.5-1.5
years in US, Singapore and Finland. Further the percentage recovered is as low
as 26% in India as compared to 78-92% in the developed economies.
Further, the Indian banking
sector is struggling through the crisis of bad debts. As per central bank, the
total stressed assets of the banks increased to 14.5% of their total loans at
the end of December, 2015. These stressed assets amount to 10 trillion rupees
which are hampering the business of the banks.
There have been several laws in
place such as Sick Industrial Companies Act, Recovery of Debt Due to Banks and
Financial Institutions Act etc but this large variety of laws have posed
as a problem for the banks, leading to failure in recovery of the loans. In
addition, which the increase in presence of global institutions and investors
in India, there have been serious concerns from the international investors on
the regulatory risks and time taken for the resolution. This calls for the need
to create a single mechanism for the businesses to resolve the insolvency.
The Insolvency and Bankruptcy code (IBC) is a single law created to consolidate
the existing framework. It is a one stop solution to the current process which
is both time consuming and not economically viable by providing a framework
which reduces the cost and time in attaining liquidity and improves the ease of
doing business. The objective of the act is to maximize the value of assets of
firms, individuals and corporates to increase the availability of credit, and
in due course of time, encourage the lenders for higher debt financing and also
to promote entrepreneurship.