One of the biggest reforms in the history of the Indian economy took place in 2016 when a new law streamlined and organized the country’s corporate insolvency resolution process. It consolidated the existing regulations into a single code and introduced effective measures like a time-bound process to resolve a case. The motive behind the creation of the new bankruptcy law in India was simple. It was formulated to counter the nation’s growing non-performing assets problem that was putting a significant strain on banks and other financial institutions. It was also deterring foreign investors from putting their money in the nation’s economy. The introduction of the law was meant to speed up the resolution process and help banks recover their debts. It has been three years since the insolvency and bankruptcy code came into effect. While the present state of the Indian economy is failing to cheer up experts, we are looking only at the contribution of the new law in improving the investment opportunities in the country.
The critics of the insolvency law point out that many of the cases are stuck in tribunals or in litigation in courts. However, some progress has been made that cannot be ignored. Let’s take a look at how it has affected the investment landscape of the country.
1. Boosted Investment In Equity
The IBC was framed to resolve unpaid debts related to an asset. It focuses on repaying the creditors but at the same time ensures that the asset remains in operation. This is necessary for protecting the future of the employees of a stressed enterprise. Businesses that seem to have great potential have seen interested investors lining up to purchase equity holdings in them. The main reason for such sentiment amongst investors is that they feel the new resolution process will help wipe the slate clean and the enterprise can make a new beginning. Once a resolution plan is approved by the National Company Law Tribunal (NCLT), then it has to be implemented by all the stakeholders. Since the process has to be completed in a specified time, investors know that a decision will be taken. This is a marked difference from before when investors stayed away from stressed assets as they did not know when the entire issue of the unpaid debts of a business will be settled.
Now, stressed assets that are undergoing the resolution process under the code, are seeing an increase in the number of interested equity investors. However, it must be noted that only those organizations that seem to have a viable business or promising future are seeing the heightened interest. Investors are keen on acquiring a stake in assets that can be brought out of the red quickly.
2. More Investment In Debt
The new law has also encouraged distressed debt investors to look for opportunities in acquiring the distressed debts of other investors. Distressed debt investors are looking to pick up liabilities of banks and financial institutions at discounts. They hope that once the resolution processes related to the unpaid amounts are settled, they can earn profits from their investments. Many asset reconstruction companies (ARCs) are also looking to acquire bad debts of other creditors. ARCs are given special licenses and are allowed to purchase debts from other institutions. The main reason ARCs and even some asset managers are showing more interest in acquiring stressed debts of other entities is that the new resolution process is conducted in a time-bound manner. This means that a decision regarding the fate of an enterprise will be reached sooner or later. Investors look at the viability of the business in question and its estimated realizable value. They also consider factors like the voting rights of the debtor in the Committee of Creditors (CoC). Probably the most important aspect that investors need to consider is the viability of a resolution plan and whether it will be accepted by everyone involved in the process or not.
Apart from increased investment opportunities, the new code has also created more chances for corporate lawyers and law firms.
More Opportunities For Legal Service Providers
The law has also created more opportunities for legal service providers. All the stakeholders involved in a resolution process- creditors as well as debtors need bankruptcy law lawyers to guide them. These professionals apply their interpretation of the code to the case and advise the clients on the possible courses of action. Corporate law firms have created dedicated wings for handling corporate insolvency cases. The structured and time-bound manner of the new resolution process encourages creditors to invoke the code to recover their investments. This means that there is an increase in demand for attorneys who are knowledgeable about the new regulation. This has opened up a new revenue stream for law firms.
An in-depth assessment of the full impact of the new regulation can be understood only after the major cases have been resolved. However, it can be said that the bankruptcy law in India has had a positive effect on the investment environment of the country.