How FM Sitharaman's decision to relax IBC will have an impact for

businesses?

Finance Minister Nirmala Sitharaman's speech of March 24 which signals that the government's
move to consider raising the threshold limit from Rs. 1 lakh to Rs. 1 crore to file any action
under IBC has come as a big relief for SSMEs and small size businesses. As the COVID-19
situation strengthens even more it presents a crisis for India's SMEs and SSMEs which have been
grappling with a fall in consumer demand over the past few quarters.

As the government has declared a 21 day countrywide lockdown to contain the rapid spread of
the novel coronavirus (Covid-19), the Indian economy is also falling. A United Nations
report has stated that the impact of the Covid-19 pandemic on Indian trade would be around $348
million. The report furthers that India features among the top 15 global economies most
adversely impacted by the manufacturing slowdown in China.

With factories closing, manufacturing activities halting, supply chains getting depleted rapidly
and companies facing a negative pressure on their cash flows, times 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. The emergence of this problem is further worsening the
woes as India is already facing its own set of problems due to slow down and stress in banking
sector due to defaults and Non-Performing Assets (NPA).

The Insolvency and Bankruptcy Code (IBC) in 2016, is a landmark enactment as on one hand, it

provides inter alia for the resolution mechanism and encourages entrepreneurship and on the face
of it, it provides for a strict mechanism of changing ownership control and winding up. The
corporate India is under severe pressure owed to IBC as lenders can take action against
defaulters even if they default by a single day on their loan payments.

The businesses may be compelled to approach NCLT under IBC due to the unprecedented

change in business scenarios as this one.

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These relief measures definitely have the potential to boost the productivity of small businesses
and commercial enterprises. They can concentrate on improving increasing their profit margins,
their bottom lines without facing disturbances in their production cycles.

They won’t be required to spend time and resources representing and defending themselves
before the NCLT to save their businesses and assets from bankruptcy. It will also help the
judicial infrastructure as there will be a decline in number of cases.

The Finance Minister also stated that Sections 7, 9 and 10 of IBC may be suspended for a
period of six months which means that neither the financial creditors, operational creditors nor
the borrowers will be able to file action under IBC.

This might have three major benefits:

First, the focus will shift on stabilising the business ecosystem and bringing banking operations
on track rather than chasing the borrower for recovery which used to create problems at both
ends;

Secondly, creation of a positive working environment for all and providing each stakeholder
enough time to strategise and recover,

Third, judicial infrastructure would be helped as it is already facing severe backlog of cases.

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

This may also provide an opportunity to unscrupulous borrowers to make advantage out of the
situation, however, this will be tackled on a case to case basis. Overall, it is a positive step and
will give a boost to trade and commerce which is required.