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Coronavirus outbreak: Why FM Sitharaman's decision to relax IBC is an important move for businesses

Finance Minister Nirmala Sitharaman's March 24 speech signaling the government's move to consider raising the threshold limit to file any action under IBC from Rs. 1 lakh to Rs. 1 crore has come as a huge relief booster shot for SSMEs and small businesses

Rajesh Narain Gupta | March 27, 2020 | Updated 02:08 IST
Coronavirus outbreak: Why FM Sitharaman's decision to relax IBC is an important move for businesses
The strengthening of the Covid-19 problem also presents an existential crisis for India's SMEs and SSMEs which have been grappling with a fall in consumer demand over the last few quarters

In an unprecedented move for the first time in more than seven decades after India's independence, the government has declared a 3-week countrywide lockdown to contain the rapid spread of the novel coronavirus (Covid-19).

A report by world body United Nations has stated that the impact on Indian trade on account of the Covid-19 global pandemic would be to the tune of around $348 million.

The report further mentions that India features among the top 15 global economies adversely impacted by the manufacturing slowdown in China.

With factories facing closures, manufacturing activity coming to a standstill, supply chains getting rapidly depleted and companies witnessing a negative pressure on their cash flows, times ahead are challenging for corporate India.

The strengthening of the Covid-19 problem also presents an existential crisis for the country's SMEs and SSMEs which have been grappling with a fall in consumer demand in the domestic economy over the last few quarters.

Also Read: Coronavirus relief measures: 5 key announcements

The emergence of the Covid-19 pandemic could not have come at a worse time for India Inc which has been facing its own set of problems particularly on slow down and the stress created for the banking sector on account of defaults and Non-Performing Assets," NPAs".

The Insolvency and Bankruptcy Code (IBC) in 2016, is seen as a landmark legislation as on the one hand it is providing inter alia for the resolution mechanism and also to encourage entrepreneurship while on the other hand, it is providing for a strict mechanism of changing the ownership control and winding up.

The corporate India undoubtedly is under severe pressure owed to IBC as lenders can initiate action against defaulters even if they default on their loan payments by a single day.

It is written on the wall that the defaults towards the lenders will certainly take place in the given circumstances and also that the dues at different levels in the supply chain may also remain unpaid, leading to the claims of operational Creditors against their clients. The unprecedented change in business scenarios may compel anyone owning a business to approach NCLT under IBC.

Finance Minister Nirmala Sitharaman's March 24 speech signaling the government's move to consider raising the threshold limit to file any action under IBC from Rs. 1 lakh to Rs. 1 crore has come as a huge relief booster shot for SSMEs and small businesses which operate at the lower spectrum of the economic value chain.

The relief measures have the potential to boost the productivity of small businesses and commercial enterprises. They can now concentrate on improving their bottom lines, increasing their profit margins and not face disturbances in their production cycles.

They will not be required to spend precious time and resources in making representations and defending themselves before the NCLT to save their businesses and assets from bankruptcy. It will also help the judicial infrastructure as the number of cases to be filed will drastically reduce for the time being.

Also Read: COVID19-driven tax reliefs to cost govt 2-3% of GDP

The Finance Minister has also stated that Sections 7, 9 and 10 of IBC may be suspended for six months. This means that neither the financial creditors, operational creditors nor the borrowers can file action under IBC.

This may have three major benefits. First, the focus will be on stabilising the business ecosystem and bringing banking operations on track instead of chasing the borrower for recovery which creates a problem at both ends; secondly creating a positive working environment for all concerned and giving each stakeholder enough time to recoup, strategise and recover, and third is to reduce the load on judicial infrastructure which is already clogged with a severe backlog of cases. In such adverse situations, stress for businesses and individuals is imminent in the given situation.

It may be important to carve out a distinction in respect of those cases where defaults have happened before the lockout situation so that unscrupulous borrowers and defaulters do not have a free ride at the cost of lenders and operational creditors. Some balancing act will be required to ensure there is no abuse of the largess on the part of the government.

The much-needed relief measures announced by FM Sitharaman reiterate the commitment of the Modi government to roll out bold steps meant to address immediate challenges to the economy.

For the economy to recover and be robust, it is important that the businesses survive and the threat of immediate stress, compromising management bandwidth and shutting businesses is checked.

This may also give an opportunity to unscrupulous borrowers to take advantage of the situation, however, the same will be tackled on a case to case basis. Overall, it is a step in a positive direction and will give a boost to trade and commerce.

(The author is Managing Partner, SNG & Partners)

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