Measuring the Impact of the Insolvency and Bankruptcy Code (IBC) on Corporate Finance, Debt and Equity Market

Written by Anushree Divedi

Table of Contents

• Introduction
• Impact on Corporate Finance
  • 1. Improved Credit Discipline
  • 2. Faster Debt Resolution
  • 3. Revival of Stressed Assets
• Impact on Debt Market
  • 1. Enhanced Creditor Rights
  • 2. Development of a Secondary Distressed Debt Market
  • 3. Reduction in NPAs
• Impact on Equity Market
  • 1. Valuation of Stressed Assets and Turnarounds
  • 2. Better Price Discovery
  • 3. Market Sentiment and Investor Confidence
• Challenges and Limitations
• Policy Recommendations
• Conclusion

Introduction

The introduction of the Insolvency and Bankruptcy Code (IBC), 2016 marked a watershed moment in India’s financial and corporate legal framework. Prior to its enactment, India suffered from a fragmented and inefficient insolvency regime plagued by delays, low recovery rates, and rampant non-performing assets (NPAs). The IBC was designed to consolidate existing laws, provide a time-bound process for insolvency resolution, improve creditor confidence, and promote responsible corporate behavior.

More than seven years since its implementation, the IBC has significantly influenced corporate finance dynamics, credit markets, and the performance of debt and equity instruments in India. This article seeks to measure and analyze the IBC’s impact on these key areas of the economy.

Impact on Corporate Finance

1. Improved Credit Discipline

One of the most immediate and visible impacts of the IBC has been the strengthening of credit discipline among corporate borrowers. The threat of losing management control during insolvency resolution has compelled firms to prioritize debt servicing and maintain cleaner balance sheets.

• Behavioral Change: Promoters are more cautious about defaulting on obligations.
• Operational Restructuring: Companies are taking proactive steps to reduce leverage and optimize capital structures to avoid insolvency proceedings.

2. Faster Debt Resolution

Before the IBC, debt resolution could take several years under the Sick Industrial Companies Act (SICA), the Companies Act, and other frameworks. The IBC prescribes a 180-day resolution process (extendable to 330 days), which has accelerated debt resolution and improved the recovery ecosystem for creditors.

• Average recovery time pre-IBC: 4.3 years (World Bank)
• Average recovery time under IBC: Approximately 1.6 years (post-implementation)

Though delays remain due to litigation and complexity in large cases, the IBC has significantly reduced the time and cost of insolvency resolution compared to earlier mechanisms.

3. Revival of Stressed Assets

The IBC promotes resolution over liquidation, allowing stressed but viable companies to be restructured and revived. Through the involvement of the Committee of Creditors (CoC) and Resolution Professionals (RPs), many distressed companies have undergone financial and operational turnaround, attracting new investors and strategic buyers.

• Examples: The successful resolution of Bhushan Steel, Essar Steel, and Electrosteel Steels revitalized sick units and safeguarded employment and production capacities.

Impact on Debt Market

1. Enhanced Creditor Rights

The IBC places financial creditors at the center of the insolvency process. This change has improved the bargaining power of lenders and bondholders, leading to greater confidence in lending instruments and more informed risk pricing.

• Increased Recoveries: The average recovery rate under IBC stands at 32–43%, significantly higher than previous laws (around 26% under SARFAESI and 14.5% under DRTs).

2. Development of a Secondary Distressed Debt Market

IBC has led to the growth of a distressed debt ecosystem, with Asset Reconstruction Companies (ARCs), private equity funds, and financial institutions actively acquiring non-performing assets (NPAs) for restructuring and resolution.

• Investor Participation: Global investors such as Blackstone, Apollo Global, and Bain Capital have entered India’s distressed asset space, viewing the IBC as a transparent and investor-friendly mechanism.

3. Reduction in NPAs

Banks have seen a notable decline in their NPA ratios due to IBC-led resolutions and increased provisioning discipline. The IBC acts as a deterrent against willful default and provides a structured mechanism to reduce the bad loan burden.

• Gross NPA Ratio for Scheduled Commercial Banks: Reduced from over 11% in FY18 to below 6% by FY23.

Impact on Equity Market

1. Valuation of Stressed Assets and Turnarounds

The IBC has unlocked value in several stressed companies, turning them into investment opportunities in the equity market. Companies emerging successfully from resolution have witnessed a re-rating of stock prices due to improved financial health and promoter credibility.

• Example: Bhushan Steel (acquired by Tata Steel) saw a resurgence in business and investor confidence.

2. Better Price Discovery

The transparent bidding process under IBC promotes competitive bidding and efficient price discovery. This benefits not only creditors but also equity markets, which can better assess the fair value of companies undergoing restructuring.

3. Market Sentiment and Investor Confidence

The existence of a robust insolvency framework boosts foreign and domestic investor confidence in India’s corporate governance environment. A clear exit mechanism reduces perceived risk, encouraging equity investment in sectors previously avoided due to unresolved stress.

• Increased FDI inflows: The improvement in ease of doing business, partly due to IBC, has contributed to India’s attractiveness as an investment destination.

Challenges and Limitations

Despite its many benefits, the IBC is not without shortcomings:

• Delays and Litigation: Many cases have exceeded the prescribed 330-day limit due to judicial delays and appeals.
• Haircuts: Creditors have accepted steep haircuts in certain cases (e.g., DHFL and Jet Airways), raising concerns about valuation mechanisms.
• Underperformance in MSME Resolution: The pre-pack insolvency framework for MSMEs has had limited uptake.
• Capacity Constraints: Insolvency professionals, NCLT benches, and resolution applicants face logistical and procedural bottlenecks.

Policy Recommendations

To enhance the impact of the IBC on corporate finance and markets, the following reforms are essential:

1. Streamline Judicial Processes: Strengthening the infrastructure of NCLT and reducing frivolous litigation will help resolve cases within statutory timelines.
2. Encourage Pre-Pack and Out-of-Court Resolutions: These can reduce the burden on courts and promote quicker settlements.
3. Better Valuation and Disclosure Standards: Ensuring realistic valuation of assets and timely disclosures will improve the credibility of the resolution process.
4. Expand Institutional Capacity: Training insolvency professionals and enhancing the role of Information Utilities will make the system more robust.

Conclusion

The Insolvency and Bankruptcy Code has fundamentally transformed India’s approach to financial distress, corporate restructuring, and credit discipline. It has improved creditor recovery, enhanced investor confidence, and catalyzed the development of a more efficient debt and equity market. While challenges remain in execution and consistency, the overall trajectory of the IBC’s impact on corporate finance is positive. With continuous refinement and institutional strengthening, the IBC can evolve into a cornerstone of India’s financial stability and market development.