The goal of IBC Promotes Entrepreneurship by establishing a transparent and time-bound process for resolving distressed businesses. The streamlined process under the IBC can increase lenders’ confidence in providing credit to new businesses, as they have a clearer understanding of the potential recovery mechanisms in case of default. Let’s look into this in more detail.
The Role of IBC in Strengthening India’s Entrepreneurial Ecosystem
Understanding IBC’s Impact on Business Growth:
Before the enactment of the IBC in 2016, entrepreneurs faced lengthy insolvency processes, discouraging risk-taking. The IBC is designed to simplify and speed up India’s insolvency resolution process and led to several reforms. The IBC (Amendment) Act of 2019 mandated that the corporate insolvency resolution process (CIRP) be completed within 330 days. This encourages faster business recovery and improved investor confidence, as creditors have a structured recovery mechanism.
Suggested Reading : Section 33 of IBC – Insolvency and Bankruptcy Code
Key Benefits of IBC for Entrepreneurs:
The IBC Promotes Entrepreneurship a “second chance” as it facilitates restructuring and reviving of the business, effectively avoiding liquidation. The insolvency framework aims to increase transparency in insolvency proceedings, which can benefit both creditors and debtors because it encourages risk-taking by offering a structured exit mechanism for failed startups. Further, foreign and domestic investors feel more secure investing in businesses knowing they can recover capital under the IBC.
How IBC Promotes Entrepreneurship And Encourages Innovation & Risk-Taking
Pre-packaged Insolvency for MSMEs:
The Amendment Act of 2021 introduced Chapter III-A to help micro, small, and medium enterprises (MSMEs) that were struggling financially due to the pandemic. The process known as the pre-packaged insolvency resolution process (PPIRP) allows faster restructuring for MSMEs, helping entrepreneurs regain control and that is how IBC Promotes Entrepreneurship It was intended to help MSMEs to resolve their issues quickly and cost-effectively while minimizing disruptions to their businesses.
Improved Credit Availability for Entrepreneurs:
The IBC provides a unified framework for resolving insolvency, which helps banks to recover funds more efficiently. Banks and non-banking financial companies (NBFCs) are now more willing to fund startups as the IBC provides a robust debt resolution framework.
Strengthening the Ease of Doing Business:
According to the World Bank’s “Ease of Doing Business” Report, India was ranked 63rd in 2020. The IBC has successfully strengthened the ease of doing business by providing a time-bound, transparent, and efficient process for resolving insolvency cases.Â
Suggested Reading :Section 9 of IBC – Insolvency and Bankruptcy Code, 2016
Case Studies – How IBC Helped Entrepreneurs & Businesses
The Jet Airways case highlighted the need for timely implementation of resolution plans, emphasising that lengthy delays can lead to liquidation even if a potential resolution exists. The court states that the IBC facilitated a new investor-led revival, preserving jobs and business value, instead of a complete shutdown. In Vallal RCK v. Siva Industries and Holdings Limited, the Supreme Court upheld the principle of respecting the commercial wisdom of the Committee of Creditors (CoC), essentially saving Siva Industries from liquidation by allowing a settlement plan with the promoters, instead of proceeding with a liquidation process initiated by the tribunals. This case demonstrated how the pre-pack model under the IBC enables promoters to regain control through a structured settlement, helping business sustainability.
Challenges Entrepreneurs Face Under IBC
Complexity & Legal Hurdles:
The IBC involves intricate legal processes with strict timelines, which can be difficult for entrepreneurs to navigate without legal expertise, particularly for start-ups and MSMEs.
High Cost of CIRP for Small Businesses:
During the insolvency process, securing new funding can be difficult as lenders may be hesitant to provide capital to a company in financial distress. Further, the process itself may be highly costly, and legal fees and insolvency professional (IP) costs can be burdensome for startups.
Limited Awareness About Pre-Pack Insolvency:
MSMEs and start-up founders are unaware of IBC’s benefits, meaning that they might miss potential business-saving opportunities. The primary concern is that MSMEs, the intended beneficiaries of PPIRP, are not adequately informed about its existence and how it can be used to address their financial distress.Â
Policy Recommendations to Strengthen IBC for Entrepreneurs
Although PPIRP has been established for MSMEs, it is recommended to extend this process to all startups for faster recovery.
It is recommended to simplify IBC documentation and reduce CIRP costs to help more IBC Promotes Entrepreneurship access its benefits.
Government and industry bodies are advised to educate business owners on leveraging IBC to avoid unnecessary shutdowns.
Conclusion
The IBC encourages risk-taking by providing a clear path for exiting failed ventures, fostering a healthy credit culture, and boosting investor confidence in the market. Thereby, it allows entrepreneurs to access funding more easily and readily take on new ventures. It mandates a swift process for resolving insolvency cases, preventing legal battles, and allowing businesses to quickly exit distressed situations, a crucial factor for entrepreneurs seeking to minimize losses and re-enter the market. Although policymakers, entrepreneurs, and investors need to maximize IBC’s potential to promote economic growth.