IBC results in 4% reduction in overall leverage: IBBI Study

The Insolvency and Bankruptcy Code (IBC) has triggered a paradigm shift in India’s corporate debt landscape, fostering fiscal discipline while enabling strategic adjustments for distressed firms, according to a recent study by the Insolvency and Bankruptcy Board of India (IBBI). The study shows that after implementation of IBC, there has been a broad-based reduction in leverage and an improved corporate governance. Analyzing data from the National E-Governance Services Limited (NeSL), the report highlights systemic behavioral changes among corporates and lenders since the IBC’s implementation in 2016.

Key Findings

1. Broad-Based deleveraging: Post-IBC, firms reduced overall leverage by 4%, with long-term and secured leverage dropping by 3.63% and 4.6%, respectively. This reflects heightened caution among companies to avoid excessive debt, driven by the IBC’s “disciplining mechanisms” and the threat of insolvency proceedings.
2. Distressed firms buck the trend: Contrary to the broader trend, highly distressed firms increased leverage by 8.24%, primarily through a 7.68% rise in short-term debt. Analysts suggest the IBC’s structured resolution framework may have boosted lender confidence, enabling vulnerable firms to access capital for survival or restructuring.
3. Governance improvements: The proportion of independent directors on corporate boards rose by 2.84% post-IBC, with distressed firms showing a 2.52% increase. This underscores governance reforms as companies prioritize transparency to align with IBC mandates.
4. Mixed R&D trends: While overall R&D intensity saw a marginal 0.04% uptick, distressed firms slashed R&D spending by 0.264%, redirecting resources to address immediate solvency concerns.

Sectoral Implications

• Cost of Debt: Distressed firms benefited from a 2.07% reduction in borrowing costs compared to stable peers, signaling lender confidence in recovery mechanisms.
• Credit Monitoring: Overdue accounts declined as banks tightened oversight, leveraging IBC’s resolution timelines to mitigate defaults.

Economic impact

The study underscores the IBC’s dual role: deterring reckless borrowing while providing a safety net for restructuring. “The Code has instilled a culture of accountability, prompting firms to settle debts proactively to avoid insolvency,” noted an IBBI spokesperson.

Challenges ahead

Despite progress, the drop in R&D among distressed firms raises concerns about long-term innovation. Experts urge balanced policies to ensure financial stability does not stifle growth investments.

Conclusion

Seven years post-implementation, the IBC has reshaped India’s credit ecosystem, curbing leverage, enhancing governance, and streamlining resolutions. As the framework evolves, its success will hinge on sustaining this equilibrium between discipline and flexibility.

Also See: IBC transforms India’s financial landscape: Forex hedging, bond markets, and exports gain momentum