[Editorial] The Insolvency and Bankruptcy Code (IBC) – Performance evaluation

Context: The performance of the Insolvency and Bankruptcy Code (IBC) — a landmark reform executed in the year 2016 — has been under intense scrutiny.

Quick revision mind map

Why is the Insolvency and Bankruptcy Code (IBC) criticized?

The Code has been mainly criticized on three counts:

  • There are inordinate delays in the resolution procedure.
  • There have been more liquidations than resolutions.
  • The recovery amounts under IBC are not substantial, making it more of a talking point than an effective structural reform.
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Performance analysis of IBC against these criticisms: A comparison with the previous regime

  • Assessing IBC based only on the average time taken to resolve successful cases does a substantial disservice to how much more efficient the IBC is compared to the previous regimes.
  • It is calculated by taking a simple average of time taken on each completed case.
  • This is one of the metrics used by the Insolvency and Bankruptcy Board of India (IBBI) to compare the IBC regime with the earlier Board of Industrial and Financial Reconstruction (BIFR) regime.
  • However, the performance of a bankruptcy resolution should ideally be evaluated along at least three dimensions:
  1. The average time that is taken to resolve a case
  2. The fraction of cases resolved within a given timeframe
  3. The recovery rate conditional on the resolution
  • Focusing on any single parameter may result in a gross under (over) estimation of the IBC’s (BIFR’s) performance.
  • By examining the fraction of cases that are resolved within a specific timeframe, we see that for any fraction of the total cases resolved under each scheme, the IBC took considerably less time than BIFR.
  • Since its inception in 1987, the BIFR has resolved less than 3,500 cases while the IBC, since it was launched in 2016, resolved about 1,178 cases until it was suspended at the onset of the COVID pandemic.
  • Most analyses of IBC’s performance overlook the important fact that many of the legacy BIFR cases were subsumed by IBC, and these were often zombie firms that were kept alive due to the massive evergreening of loans between 2008-2015.

What can be concluded from this analysis?

  • The bottom line is straightforward: The IBC has significantly outperformed the earlier BIFR regime in terms of the speed of resolution.

Practice Question for Mains

  1. The IBC is potentially as effective as a disciplining device as much as it is a resolution mechanism. Critically comment. (150 Words, 10 Marks).
Referred Sources

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