Don't dilute IBC

Mediation can be before the insolvency process, not during

The Insolvency and Bankruptcy Code (IBC) has been one of the major reforms of the past five years. It promised to effectively solve what former Chief Economic Advisor Arvind Subramanian has called the “exit problem”, in which capital continues to be tied up in unproductive units long after it should have been released. The additional benefits were that, first, it would improve the incentives facing promoters who have traditionally believed that they could hold on to their companies even when running them into the ground; and second, that it would aid public sector banks in particular in recoveries of some proportion of their non-performing assets. These two benefits do not always work in tandem, as banks might see a chance of recovering a larger proportion of their lending if promoters are allowed to participate in the IBC process. Partly as a consequence, the IBC has run into one big problem: Timing. Because the legal system has not been streamlined and also because of a lack of capacity, the original timeline — of 180 days with a 90-day extension — is not being adhered to. One major such case, resolution of troubled 

Essar Steel, has been pending now for 600 days. The average time taken for the entire process of debt resolution under the corporate insolvency resolution process is 300 days. Though this is a vast improvement over the five to eight years taken under the process prescribed by the earlier Board for Industrial and Financial Reconstruction, there is obviously scope for further improvement under the IBC process. 

It has now been reported that one of the ways in which the government is considering modifying the IBC in order to deal with delays is to introduce mediation into the process. This requires more thought. While mediation itself is certainly an important way in which disputes over troubled assets can be resolved, it should not be introduced into the insolvency process itself. Once the IBC is triggered, it should be allowed to continue within the legal system without granting yet another out for creditors and promoters to reach side deals. The point of the IBC process is to create a standardised, open and transparent approach to dealing with problems that have passed the point of no return. If indeed mediation is still possible, it should instead be tried before the IBC is triggered. Once the IBC is triggered, the existing promoters must no longer be considered to be relevant — they are forbidden from bidding, after all. 

The government’s attempt to address the slowdown in insolvency proceedings is welcome, but the IBC itself should not be diluted significantly. As former Reserve Bank of India governor Raghuram Rajan has pointed out, ideally there should be many alternatives explored before triggering the IBC — and mediation is one of those alternatives. The best way forward for empowering the IBC, however, is to return to what was planned in the original draft of the IBC — namely to create and expand capacity for resolution. A larger cadre of resolution professionals and more capacity in the legal system will go a long way towards addressing slowdowns in the IBC process. The legal system must also play a part in minimising opportunities for promoters and others to appeal outside the IBC in such a way that the process and the timeline are not undermined.