From Distress to Resolution: A Study of RBI-12 Cases Under the IBC, 2016

Abstract

The Insolvency and Bankruptcy Code (IBC), 2016, was introduced to streamline insolvency resolution in India, replacing ineffective earlier mechanisms such as the Companies Act (1956), SICA (1985), RDDBFI Act (1993), and SARFAESI Act (2002). These frameworks failed to provide timely resolutions and were largely restricted to banks and financial institutions, leaving other creditors dependent on an overburdened judicial system. The Reserve Bank of India (RBI) attempted to improve recovery rates through schemes like Corporate Debt Restructuring (CDR) and Strategic Debt Restructuring (SDR), but these were inadequate. With the enactment of the IBC, the Banking Regulation Act (1949) was amended to empower the RBI to direct banks to initiate insolvency proceedings against defaulters, leading to the launch of the Corporate Insolvency Resolution Process (CIRP).

The RBI initially identified 12 major stressed accounts, known as the ‘RBI-12’ or ‘Dirty Dozen,’ accounting for 25% of total banking sector NPAs, followed by an additional list of 28 distressed accounts for CIRP proceedings. The study evaluates the effectiveness of the IBC by comparing NPA recovery rates of Scheduled Commercial Banks (SCBs) under the IBC with previous resolution mechanisms. Findings indicate that the IBC has significantly improved recovery rates and reduced the average resolution time from 4.3 years to 394 days, though delays persist in some cases. The successful resolution of Essar Steel under CIRP led to positive stock market reactions, reflecting increased investor confidence due to strengthened creditor protections. Moreover, India's improved Ease of Doing Business ranking has enhanced its attractiveness for investment. However, challenges remain, such as significant haircuts for lenders, impacting their financial stability, and the shift of decision-making power from corporate managers to the Committee of Creditors, potentially altering corporate governance dynamics.