An empirical analysis of India’s insolvency code: perspectives based on ex-post economic efficiency

Abstract

Purpose

This study aims to analyse the outcomes of Indian insolvency proceedings for their ex-post economic efficiency. Ideally, insolvent yet viable companies should witness resolution, whereas insolvent-unviable companies should be liquidated. This study aims to ascertain the key forces that ensure or prevent the application of the first part of this maxim in practice.

Design/methodology/approach

The study uses logistic regression on a sample of 320 corporate insolvencies (out of 942 insolvencies) reported under the Insolvency and Bankruptcy Code (IBC), 2016. Two-stage least squares regression is used to check endogeneity issues.

Findings

The results claim high levels of rationality from the financial creditors and acceptable levels of viability from the plan proposers for precluding liquidation of insolvent yet viable companies. The findings reveal that an excess of value from resolution over that from liquidation, controls the outcomes of insolvency proceedings. Further examinations indicate that financial creditors’ focus on upfront recovery prevents them from judging the plans on other viability-related factors. Based on the findings, this study recommends that IBC must focus on the importance of both long-term recovery rates and resolution.

Originality/value

To the best of the authors’ knowledge, this is one of the first studies to empirically analyse Type 2 efficiency-related errors prevalent in the Indian insolvency proceedings since the enactment of its new code. The empirical explorations offered in this research can prove to be unique for policy-making.