India remains a very difficult country for dying companies

Source: Live Mint

Relevance: Insolvency bankruptcy code and corporate failure

Synopsis: The failure of Insolvency bankruptcy code to achieve its intended objectives is dubbed as ‘isomorphic mimicry’ by developmental scholars.

What is ‘isomorphic mimicry’?

It is the tendency of governments to mimic (copy) other governments’ successes, replicating processes, systems, and even products of the “best practice” examples.

Issues pertaining to the IBC

Global investors were genuinely excited by India’s 2016 insolvency law, hoping to profit from bad loans. Initial success with distressed steel plants raised hopes that the savings-starved economy would extricate valuable capital from failed ventures.

But now, IBC is challenged by

• Low recovery rate (90% haircuts)
• Lack of bailout funds
• Long delays in admitting cases by tribunals
• Shortage of judges: Across the country, 27 tribunals are being run by 29 judges, at least 25 short of what’s required. Many have no experience in financial matters. Insolvency courts also adjudicate unrelated matters under the Companies Act, overwhelming an already strained system. Delays abound, not just in approving a sale or liquidation in 270 days as the law proposed originally (it was later increased to 330 days), but even in admitting cases.

Way forward

It’s still not too late to fix the bankruptcy regime. Maybe it will happen only once the state is no longer a dominant player in the lending market.