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Ease of exit is just as important as ease of entry in an economy based on innovation and entrepreneurship. While there has been a significant improvement in involuntary liquidation from insolvency and bankruptcy since the introduction of Insolvency and Bankruptcy Code (IBC) 2016, it is important to recognise that most liquidations are voluntary.
These could be due to change in technology, for personal reasons, and so on. Voluntary closures were very time consuming in India till recently, even when there were no legal issues or tax pendencies.
This article explores how a systematic focus on process reforms has dramatically improved the ease of voluntary exit.
Two routes
There are two ways of voluntary liquidation in India currently. One is under the IBC and other is under Section 248(2) of the Companies Act, 2013. Here we have focused only on the route under the Companies Act as a vast majority of the cases are routed through it. Companies which have no pending litigations against them and have extinguished all assets and liabilities are eligible to apply via this route.
Hence, it is reasonable to expect that this should be a relatively fast process. However, as pointed out in our paper in 2021, the process actually took years (‘Simplifying Voluntary Liquidation Process: Improving Ease of Exit in India’ in IBBI’s Annual publication 2021).
The approval process took on an average 499 days in 2020-21 and 2021-22. Granular details are even more stark. Out of the total cases disposed of in 2020-21, about 4 per cent cases had taken less than 90 days, 19 per cent were approved within 90 days to 360 days. The bulk of the cases took more than a year- with about 63 per cent disposed of in 361 days to 720 days and rest taking even longer.
The situation was not very different in 2021-22. Remember that this is for companies which have no liabilities towards any regulatory body, business supplier or workers, and has no pending litigation. The fact that it used to take so long was clearly detrimental to ease of doing business.
In our 2021 paper, we discussed several issues leading to delays. First, there were no strict timelines for the Registrar of Companies (RoCs) to follow. Second, there were huge delays in publishing the notice of ‘strike-off’ in newspapers.
Lack of standardisation
Third, there was lack of standardisation of documents to be submitted which meant they needed to be repeatedly resubmitted for any minor inconsistency in the notarisation or other stage, causing delays.
We had argued for removing these bottlenecks and creation of a single window for the entire process. The Ministry of Corporate Affairs has not merely resolved those issues, but has gone beyond the solutions we had envisaged at that time. The results have been dramatic.
To begin with, the administrative issues in the process were resolved which reduced the average time of disposal of applications to 195 days in the very first year of reform (that is, 2022-23). Not only this, 94 per cent applications were being disposed of in less than a year now.
Next, Finance Minister Nirmala Sitharaman announced the setting up of Centralized Processing for Accelerated Corporate Exit (C-PACE) in Union Budget 2022-23 with the aim of expediting the voluntary closure. At that time, the goal was to reduce the time to less than six months.
Single-window system
C-PACE became operational on May 1, 2023. This is a centralised single-window system for companies, external regulators and RoCs. In addition, nodal officers were identified from each department, time for each step was fixed, and the number of resubmission requests by RoCs was limited.
The entire process of publishing notices in the gazette and newspapers were streamlined with the publications happening weekly or fortnightly. Furthermore, the system was made completely transparent and faceless requiring no physical interaction with the applicants.
In the first year of its existence, C-PACE has struck off 14,390 companies. This includes the cases that were pending in the old system and had been transferred to C-PACE. The average time taken for striking-off of cases filed under this system has reduced to only 90 days (from 499 days in 2021-22), an 82 per cent reduction over two years. This is even better than what was envisaged when it was announced. Our research suggests that this is one of the fastest in the world.
The above process reform is a good example of how a system can be made much better with just systematic mapping of a process and resolving bottlenecks. This has been done in various areas as well, and with equally dramatic results (as in the case of patent grants exceeding one lakh in 2023-24).
This experience shows that there is a case for mapping processes in every single area where government interacts with business entities or common citizens so that they can be radically smoothened.
Sanyal and Arora are Member and Joint Director, respectively, in Economic Advisory Council to the PM. Views are personal
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