The IBC has established a structured framework for resolving insolvency, encouraging collaboration between creditors and debtors to seek mutually beneficial resolutions. As a result, a culture of responsible entrepreneurship has been nurtured, where entrepreneurs are held accountable for the outcomes of their businesses, whether successful or otherwise.
When IBC was enacted, the Parliament explicitly recognized that the core aim of the IBC revolves around fostering entrepreneurship and nurturing innovation. While it’s inevitable that certain business endeavors may falter, the key distinction lies in their prompt and agile resolution. Under IBC entrepreneurs and lenders alike will gain the ability to swiftly progress forward instead of being hindered by lingering decisions of the past.
The IBC is a recent legislative development that can easily be said to be in its initial stages and has been undergoing rapid evolution due to changes/amendments not only introduced by the legislature but also by the out of box approach of the Judiciary. Both the judiciary and legislative authorities acknowledge the significance of innovation in the implementation of the resolution process outlined in the IBC. The judicial authorities understand that a one-size-fits-all approach is not applicable to resolution processes and comprehend that tailored solutions are imperative for each case under the IBC, all aligned with the objective of the Code.
The Adjudicating Authority, the Appellate Tribunal, and the highest court of the land have consistently introduced fresh perspectives with the assistance of stakeholders and their counsels. These include supporting the commercial wisdom of the Committee of Creditors, safeguarding Successful Resolution Applicants against hydra popping of claims post approval of resolution plan and providing a clean slate, venturing into unchartered territories by piloting the concept of reverse CIRP in case of real estate companies where promoter is willing to complete the project by infusing the funds as lender while staying outside and handover flats to homebuyers, experimenting the concept of group insolvency, etc.The IBC has proven to be instrumental in resolving challenges faced by entrepreneurs nationwide. Under the Code, the Corporate Insolvency Resolution Process (CIRP) is targeted to be completed within an average period of 330 days, which includes the time spent on litigation. This is significantly shorter compared to the previous regime which took over four years to complete. As a result of these improvements, India’s ranking in the latest Business Environment Rankings (BER) globally has risen to 10th out of 17 economies in the Asian region for the forecast period of 2023-27, a notable increase from its 14th position during the 2018-22 period. This data has been released by the Economist Intelligence Unit (EIU). Further, according to the latest Ease of Doing Business Index, 2020 report by the World Bank on ease of doing business, India ranks 63rd out of total 190 countries with a doing business score of 71.0.The IBC has surfaced as a dynamic force propelling innovation within India’s entrepreneurial landscape. Several dimensions through which the IBC has empowered the entrepreneurial ecosystem are outlined below.Creating a Risk-Friendly Environment
One of the primary hurdles faced by entrepreneurs is the fear of failure and the associated consequences. Innovation for entrepreneurs requires risk-taking, and the IBC addresses this concern by instilling confidence in them. The Code allows for a quicker resolution of insolvency cases, providing failed entrepreneurs with a fresh start, free from the burden of past debts. The “second chance” culture encourages entrepreneurs to experiment with innovative ideas without the fear of being crippled by insurmountable liabilities in case of failure.
Enhancing Creditor Confidence
The IBC’s success in expediting insolvency resolution and maximizing value for creditors has significantly enhanced their confidence in the Indian market. As per the latest data released by IBBI until March 2023, a total of 678 Corporate Debtors (CDs) have been successfully salvaged under the provisions of the Code. Among these, 117 CDs have admitted claims exceeding INR 1,000 crore. Up until December 2022, 102 of these high-value CDs have yielded resolution plans. Notably, during the span of January to March 2023, an additional 14 CDs with substantial claims have achieved resolution plans. With a reliable mechanism to address distressed assets, creditors are now more willing to extend credit to entrepreneurs, even in risky ventures. This improved access to capital plays a crucial role in fueling innovation and growth in the entrepreneurial ecosystem.
Promoting Entrepreneurial Flexibility
The IBC has introduced a time-bound and transparent insolvency resolution process. This has led to faster decision-making, resulting in more efficient reallocation of resources. Entrepreneurs are now more likely to take calculated risks, knowing that the IBC ensures a timely resolution of insolvency cases. This enhances the entrepreneurial ecosystem’s resilience, as the lessons learned from failures contribute to future success stories.
Encouraging Investment in Distressed Assets
The IBC has created a unique opportunity for investors to acquire distressed assets at competitive prices. Faster resolution of cases under IBC has spurred M&A deals in India, as bidders can now more easily acquire stressed assets at lucrative prices. This has attracted both domestic and foreign investors, leading to an influx of capital into the market. The IBC offers a streamlined and timebound platform for investors to venture into new lines of businesses with pre-existing infrastructure facilities. Investors find this approach more favorable in contrast to commencing an entirely new business from scratch as the underperforming ventures can be transformed into thriving entities. This, in turn, contributes to job creation and overall economic growth.
Facilitating Technological Advancements
The IBC places significant importance on ensuring transparency and accountability, which has spurred the integration of technology within the insolvency resolution framework. This integration has been facilitated by the introduction of the Information Utility (IU) concept within the Code. As of now, the National e-Governance Services Ltd. (NeSL) stands as the sole registered IU under the Code, functioning as a central repository for all debt and default information provided by creditors. NeSL also provides validation and verification services for such debt and default data. This concept is very new within the Code and requires to undergo progressive refinement.
Additionally, various official web portals, such as those of the Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI), furnish prompt updates to stakeholders regarding the inclusion of any CDs under the IBC. This technological shift ensures that stakeholders remain well-informed and equipped to make informed decisions.
Supporting Startups and MSMEs
Startups and Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India’s entrepreneurial ecosystem. The IBC recognizes their unique challenges and provides them with certain relaxations to encourage their growth. The Code has exempted micro and small enterprises from the rigors of insolvency proceedings, thereby fostering an environment conducive to innovation and growth. IBC has made room for a huge shift of power from the hands of the shareholders and the debtors to creditors. It helps the SMEs (small and medium enterprises) to reorganize their affected business and get back on their feet in an efficient manner. It aids small entrepreneurs, especially during an economic breakdown when their business has come to a standstill by being a guiding force to promote the spirit of entrepreneurship.
Encouraging Cross-Border Investment
The IBC has also played a significant role in attracting foreign investment into India. The transparent and efficient resolution process has instilled confidence in international investors looking to invest in distressed assets. As cross-border investment increases, Indian businesses gain access to global expertise, technology, and markets, stimulating innovation and creating a more competitive entrepreneurial landscape.
Role of Insolvency Bankruptcy Board of India
The Insolvency and Bankruptcy Board of India (IBBI) has notified fast track insolvency resolution process (“Fast-Track CIRP”) under Chapter IV of the Code. The provisions of Fast-Track CIRPhelp in accelerating the resolution process of the default cases of small companies and start-ups within the period of 90 days which can also be extended by 45 days.This provision is crucial as a faster resolution process attracts several investors to start-ups and small firms most of which don’t survive for long. Further, Section 29A of the Code provides relief to MSMEs by relaxing the applicability of the provision regarding the submission of a resolution plan. The main idea behind this enactment was to grant exemptions to CDs which are MSMEs by granting permission to promoters not being the willful defaulters to bid for the resolution plan of an MSME.
In conclusion, the IBC has emerged as a catalyst for innovation in India’s entrepreneurial ecosystem. By fostering a risk-friendly environment, promoting resilience, and encouraging investment in distressed assets, the Code has significantly contributed to cultivating innovation. Additionally, its focus on technology, support for startups and MSMEs, and enhancement of creditor confidence have collectively nurtured a vibrant and dynamic entrepreneurial landscape. As the IBC continues to evolve, its role in fostering innovation and nurturing India’s entrepreneurial spirit will undoubtedly remain pivotal in propelling the country toward economic prosperity and global recognition.
Daizy Chawla is Senior Partner and Jatin Kapoor is Senior Principal Associate at S&A Law Offices.
