NEW DELHI: The Reserve Bank of India (RBI) Deputy Governor M. Rajeshwar Rao has highlighted the need for stronger preventive mechanisms to minimise the very need for insolvency proceedings altogether.
The Insolvency and Bankruptcy Code (IBC), implemented in 2016, has undeniably reshaped India’s corporate recovery landscape. Speaking at a conference organised by the Insolvency and Bankruptcy Board of India (IBBI) and INSOL India, Rao proposed an enforceable code of conduct for the Committee of Creditors (CoC) as a cornerstone for improving the resolution ecosystem.
“The real success of a formal insolvency process lies in its role as a deterrent rather than its frequency of use,” Rao remarked, emphasising the importance of addressing issues before they reach the courtroom.
Preventive approach
Rao revealed that by March 2024, nearly 28,000 cases involving defaults worth Rs10 lakh crore had been withdrawn prior to admission under the IBC. This statistic underscores the untapped potential of proactive measures, where meticulous planning, stronger stakeholder collaboration, and sound governance could avert insolvency proceedings.
The Deputy Governor highlighted several challenges with the CoC – key decision-makers in the resolution process – including: prioritising individual creditor interests over collective resolutions; disputes over valuation, viability, and distribution of proceeds and lack of effective participation, coordination, and engagement.
Such inefficiencies, Rao suggested, often exacerbate delays and derail the objective of swift resolutions.
Enforceable code of conduct
Acknowledging the pivotal role of the CoC, Rao proposed an enforceable code of conduct to address these shortcomings. “It is in the larger interest of creditors to self-regulate rather than wait for external mandates,” he said, adding that IBBI should ideally have the power to enforce norms across all stakeholders in the IBC ecosystem.
He stressed that misaligned incentives often lead to deviations from best practices. An enforceable code could foster accountability, transparency, and consistency, aligning stakeholder actions with the broader goal of resolution efficiency.
Beyond the courtroom
Rao’s remarks also pointed to the broader need to address root causes of financial distress. He urged stakeholders to strengthen underwriting standards as robust lending practices can prevent unsustainable borrowing patterns.
From resolution professionals to creditors, fostering a collaborative approach can expedite solutions. He underlined that proactive action against stalling by corporate debtors can ensure timely resolutions.
IBBI Chairperson Ravi Mital echoed these sentiments, highlighting ongoing discussions around integrating mediation processes into the IBC framework. “Mediation could serve as an efficient tool to resolve disputes and preempt cases from escalating to formal proceedings,” Mital said.
Role of resolution professionals
Rao also emphasised incentivising resolution professionals appropriately to attract the best talent. “Compensation should be determined by market dynamics and commercial considerations,” he suggested, underlining the critical role of these professionals in managing insolvency cases.
Path forward
As India’s insolvency framework matures, stakeholders must align efforts to focus on prevention rather than resolution. Proposals like an enforceable CoC, enhanced mediation options, and stronger governance norms hold the potential to reduce the burden on insolvency courts while creating a culture of financial discipline.
By prioritising preemptive actions and collaboration, India can turn its insolvency framework into a robust deterrent, ensuring that financial distress is addressed at its root and businesses are guided back to health without entering a courtroom.
