The Impact of India's Insolvency and Bankruptcy Code 2016 on FDI Inflow

Background of Corporate Insolvency in India before IBC

Before the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016, the scenario for corporate insolvency in India was far from ideal. When a company was unable to pay its debts, the usual recourse was to file for insolvency. This process was notoriously time-consuming and demanding, often taking years to complete. Imagine a company on the brink of closure, lacking the funds to resolve its financial obligations. The necessity to navigate a complex series of procedural steps and obtain numerous permissions from different authorities made the situation even more challenging.

Various laws governing corporate insolvency earlier added to the complexity:

Lack of Entrepreneurs: The process often deterred entrepreneurs from starting new businesses, fearing the impending insolvency situation. FDI Deterrence: Foreign Direct Investment (FDI) in India was also wary of the insolvency risks, leading to inadequate foreign investment. Banks' Caution: Indian banks were hesitant to finance businesses due to the high risk of insolvency liabilities. Stigma of Insolvency: Insolvency was often seen as a stigma, causing significant emotional and financial distress to individuals and businesses once they were declared insolvent.

As a result, the business environment and attractiveness for investment in India were severely hampered. Many feared that the existing framework for dealing with insolvency was not only ineffective but potentially fatal to businesses.

During a parliamentary session, Mr. Arun Jaitley highlighted that the Sick Industrial Companies Act (SICA), intended to revive sick companies, had inadvertently led to the slow death of many businesses instead of their revival. The current Insolvency and Bankruptcy Code 2016 (IBC) was seen as a necessary reform to address these issues.

How IBC Changed the Landscape

The enactment of the Insolvency and Bankruptcy Code radically transformed the business environment in India, contributing significantly to the country's ease of doing business ranking.

Better Ease of Doing Business Ranking: India climbed 30 positions in the Ease of Doing Business index, ranking among the top 100 nations. Improved Resolving Insolvency Parameter: India went from a rank of 136 to 103 in the 'resolving insolvency' category. Quicker and Faster Process: With a streamlined process, businesses can now resolve insolvency much more quickly, typically within 180 days. Role of Resolution Professionals: Skilled professionals can take over a company's operations if insolvency is declared. Protection of Creditor's Rights: Creditors who have provided funds (debtors) are given priority over assets to be settled. Claims Over Rs. 100,000: Any creditor with a default of more than Rs. 100,000 can initiate a Corporate Insolvency Resolution Process (CIRP). Wide Scope of Application: The IBC applies to all forms of insolvency and bankruptcy, from individuals to companies. Overrides Existing Provisions: Any provisions dealing with insolvency that are not in line with IBC are overridden.

The introduction of these reforms offers a robust framework for addressing insolvency issues efficiently. It instills confidence among investors, including FDI inflow, by providing security and certainty regarding the recovery of funds and the protection of creditors' rights.

Fundamentally, the IBC provides a much-needed corrective measure to the existing stringent and cumbersome legal process, thereby promoting a healthier business environment and encouraging more FDI into the country.