Efficient priority rules and the Indian IBC

18 Pages Posted: 24 Jul 2019

See all articles by Nishant Chadha

Nishant Chadha

Indian Statistical Institute, New Delhi - India Development Foundation

Shubhashis Gangopadhyay

India Development Foundation; University of Gothenburg; University of Groningen, Faculty of Economics and Business, Students; Indian School of Public Policy

Date Written: January 15, 2019

Abstract

India passed a comprehensive and new Insolvency and Bankruptcy Code (IBC) on May 28, 2016. Prior to this, institutional debt defaults were handled through a number of different laws and regulations, like SICA, 1985, Debt Recovery Act, 1993, SARFAESI, 2002 and Company Law, 2013. In addition, for companies above a certain size, the High Courts had to be involved, especially in winding up decisions. The IBC, being a uniform code, was meant to reallocate assets more efficiently and quickly. In this paper we develop a model that gives rise to credit rationing as a result of moral hazard and investigate the efficiency of three different possible priority rules: (a) when financial creditors have priority over operational creditors (b) when operational creditors have priority over financial creditors and (c) when both have equal priority. We argue that the extent of credit rationing is invariant under all three priority rules. We then show why a cost of business indicator that looks only at the price of inputs is flawed in determining efficiency.

Keywords: Bankruptcy Code, Credit rationing, Debt Recovery

JEL Classification: K22, G33

Suggested Citation

Chadha, Nishant and Gangopadhyay, Shubhashis, Efficient priority rules and the Indian IBC (January 15, 2019). 3rd Chapman Conference on Money and Finance - Financial Market Development in Emerging Asia: Impact on Corporate Performance, Capital Flows and Politics | May 4, 2018, Available at SSRN: https://ssrn.com/abstract=3424354 or http://dx.doi.org/10.2139/ssrn.3424354

Nishant Chadha

Indian Statistical Institute, New Delhi - India Development Foundation

249 F, Sector 18
Udyog Vihar Phase IV
Gurgaon, Haryana 122015
India

Shubhashis Gangopadhyay (Contact Author)

India Development Foundation ( email )

4101 DLF Phase IV
Gurugram, Haryana 122002
India
+91 9910991221 (Phone)

University of Gothenburg

Gothenburg
Sweden

University of Groningen, Faculty of Economics and Business, Students

Postbus 72
9700 AB Groningen
Netherlands

Indian School of Public Policy

Delhi
India

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