A parliamentary standing committee has called for an overhaul of the Insolvency and Bankruptcy Code (IBC), 2016. The major concern has been over large haircuts and a high rate of liquidation. While the suggestion to overhaul the law is welcome, it is important to understand the root cause of the problem and address the same.
Somehow, while assessing the effectiveness of the Code, too much emphasis has been laid on haircuts, which is often seen as the only determinant of its success. The IBC is not responsible for large haircuts. This is the result of losses in enterprise value. Why should the market pay 1,000 for an asset that is worth only 100 by the time it comes under IBC? Fixing a limit on a haircut is like asking the market to pay …
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