IBC AND THE RISE OF THE DISTRESSED ASSET MARKET IN INDIA

The Insolvency and Bankruptcy Code (IBC), introduced in 2016, has significantly transformed the landscape of corporate distress in India. Aimed at creating a time-bound and transparent mechanism for resolving insolvency, the IBC has not only strengthened creditors’ rights but also catalyzed the growth of India’s distressed asset market. This new market, primarily driven by asset sales from distressed companies, is reshaping investment opportunities, attracting both domestic and global investors.

For over 20 years, The Law Codes has been actively involved in guiding clients through the complexities of insolvency and bankruptcy matters. Through our work, we have witnessed firsthand the evolution of the distressed asset market and the vital role the IBC has played in this transformation.

THE DISTRESSED ASSET MARKET: AN OVERVIEW

The distressed asset market involves the buying and selling of assets of companies facing financial difficulties or insolvency. These assets could include physical property, land, machinery, intellectual property, and even entire business operations. In the past, distressed asset sales in India were largely informal and fragmented, with limited participation from institutional investors. However, with the establishment of the IBC, the distressed asset market has gained significant traction.

Under the IBC framework, when a company defaults on its debts and enters the insolvency resolution process, its assets are either sold or restructured as part of the resolution plan. The goal is to maximize the value of the company and ensure that creditors recover a significant portion of the debt owed. This has led to an increase in the availability of distressed assets, creating lucrative investment opportunities for domestic and international investors.

HOW THE IBC HAS FOSTERED THE GROWTH OF THE DISTRESSED ASSET MARKET

Streamlined Insolvency Resolution Process

One of the key factors driving the rise of the distressed asset market is the time-bound, efficient process introduced by the IBC. Prior to the enactment of the IBC, the resolution of distressed companies in India was slow and fragmented, with multiple laws and forums involved. This often led to prolonged litigation, uncertainty, and significant depreciation of asset value.

The IBC introduced a 180-day (with possible extensions) period for resolving insolvency, creating a much more predictable environment for both creditors and investors. By ensuring that assets are sold or restructured within a fixed timeline, the IBC enhances the liquidity of distressed assets and ensures that their value is preserved. The clarity and speed of the IBC process have encouraged both domestic and foreign investors to consider distressed assets as a viable investment class.

Role of the Committee of Creditors (CoC)

Under the IBC, the Committee of Creditors (CoC)—a body made up of financial creditors—plays a central role in approving resolution plans and deciding the fate of the distressed company. This gives creditors greater control over the outcome of the insolvency process, ensuring that the assets are sold or restructured in a manner that maximizes recovery.

The CoC’s influence has also created an active market for distressed assets. Investors, especially private equity funds and asset reconstruction companies (ARCs), are now more confident in acquiring distressed companies or assets knowing that the CoC has a key say in the decision-making process. This level of transparency and control has bolstered the growth of the distressed asset market.

Introduction of Asset Reconstruction Companies (ARCs)

The IBC has also led to the emergence of Asset Reconstruction Companies (ARCs) as key players in the distressed asset market. ARCs are financial institutions that specialize in acquiring distressed assets, restructuring them, and selling them for a profit. The IBC framework has provided ARCs with the legal backing to purchase distressed assets from financial creditors and attempt to turn around distressed businesses.

With the increased flow of distressed assets through the IBC process, ARCs now have a steady stream of opportunities to invest in distressed companies. Their role is critical in the distressed asset market, as they not only acquire assets but also bring in expertise to restructure and revive businesses.

Increased Participation from Foreign Investors

The rise of the distressed asset market has been accompanied by an influx of foreign investors, including private equity firms, hedge funds, and multinational corporations. International investors are now looking at India’s distressed asset market as a promising investment opportunity, driven by the certainty and clarity brought about by the IBC.

The presence of global investors has contributed to the growth of the market by introducing advanced restructuring techniques, funding, and operational expertise, all of which help realize the potential value of distressed assets. Foreign investors are also attracted by the significant discounts available on distressed assets, which allow them to acquire assets at a fraction of their original value.

Market Liquidity and Greater Transparency

One of the challenges in the distressed asset market before the IBC was the lack of liquidity and transparency in asset sales. The IBC’s clear procedures and centralized platforms, such as the National Company Law Tribunal (NCLT) and the Insolvency and Bankruptcy Board of India (IBBI), have brought greater transparency and predictability to the process of distressed asset sale.

As a result, there is now an efficient marketplace where assets are valued, marketed, and sold openly. Investors can assess distressed assets based on detailed financial and operational reports, making it easier for them to make informed investment decisions. This transparency has contributed to a more active and competitive distressed asset market in India.

IMPACT OF THE DISTRESSED ASSET MARKET ON THE INDIAN ECONOMY

Enhancing Credit Discipline

The rise of the distressed asset market and the implementation of the IBC have significantly enhanced credit discipline in India. Lenders are now more cautious when extending credit, knowing that in the event of default, a formal and efficient process exists to resolve the distress. This has led to a reduction in bad loans and has incentivized banks and financial institutions to conduct more rigorous assessments of borrower creditworthiness.

Asset Revitalization and Economic Growth

The distressed asset market offers a pathway for the revitalization of struggling businesses. Instead of letting distressed companies collapse, the IBC provides a mechanism for their restructuring, enabling them to survive, grow, and contribute to the economy. By facilitating the purchase and turnaround of distressed assets, the IBC encourages investments that can lead to the creation of jobs, improved operational efficiency, and enhanced competitiveness in the market.

Attracting Investment

The growth of the distressed asset market has attracted both domestic and international investors to India, leading to an increase in investments. By offering an organized, transparent, and time-bound resolution process, the IBC has made India a more attractive destination for capital, which is crucial for the country’s economic development.

CHALLENGES AND FUTURE OUTLOOK

Despite the progress, challenges remain in India’s distressed asset market. For instance, the market is still developing, and the legal framework surrounding distressed asset sales and resolution processes can be cumbersome at times. The success of the distressed asset market also depends on the ability of insolvency professionals to manage complex resolutions and the willingness of all stakeholders to collaborate.

Moreover, investors may still face challenges with asset valuation, the lack of adequate information, and uncertainties regarding regulatory compliance. As the IBC matures, these issues will likely be addressed, and the market will continue to evolve.

CONCLUSION

The IBC has undoubtedly revolutionized the way distressed assets are handled in India, giving rise to a thriving distressed asset market. By creating a structured, transparent, and time-bound process for insolvency resolution, the IBC has facilitated the flow of distressed assets into the market, attracting both domestic and international investors. The role of the IBC in driving economic growth, enhancing credit discipline, and promoting the revitalization of distressed businesses cannot be overstated. At The Law Codes, with over 20 years of expertise in insolvency and bankruptcy law, we are proud to be part of this transformation, assisting clients in navigating the complexities of the distressed asset market. As the market continues to mature, the IBC will remain a cornerstone of India’s financial and economic recovery, presenting significant opportunities for investors and creditors alike.