For past many years, it has been governments’ endeavour to bring structural reforms through policy and legislative measures to ensure ease of doing business. Prominent among these are Insolvency and Bankruptcy Code 2016 (IBC) and Industrial Relations Code 2020 (IRC). IBC was introduced to allow failed businesses a chance to restart or exit smoothly. IRC was introduced to ensure industrial peace and harmony and to free majority (91%) of industrial establishments from government control as threshold for government’s prior approval before closing industrial establishment has been raised to 300 workers from the earlier 100 workers under the Industrial Disputes Act. The impact of these structural reforms can be observed from the fact that more than two lakh private companies were reported as closed in the past five years due to mergers, conversions, inactivity, formal strike-off, etc.

Ease of closure refers to how quickly and efficiently a business can be closed through legal proceedings and it is measured mainly by time taken to close, total cost of closing a business as a percentage of total assets of company and recovery rate for creditors.

Based on the latest comprehensive World Bank Doing Business 2020 data the top ten performers in ease of resolving insolvency which an indicator of ease of closure are Norway, Ireland, Finland, Japan, New Zealand, Belgium, UK, Singapore, Canada and South Korea, whereas India ranks at fifty two. India is not the worst performer but it is definitely less efficient than advanced economies. The closure proceedings are finished within a year in all these countries, having a strong legal system.

In India, businesses can be closed after following a procedure mandated under various applicable laws in each case like Companies Act, Insolvency and Bankruptcy Code, Labour laws, etc. The IBC mandates maximum 330 days for legal proceedings. However, implementation is the real bottleneck and in practice, cases often take 2-4 years due to regulatory procedures, shortage of experienced insolvency professionals and multiple appeals up to the Supreme Court. The procedural delay is indicative of less efficient legal system and low out of court settlements due to weak alternate dispute resolution mechanism.

The delay caused by any factor whatsoever has indirect cost. The cost of closure in India is roughly 10% of the total asset value as compared to 3-5% in other advanced countries. The cost includes legal fees, court/tribunal fees, fees of insolvency professional, administrative costs, auction/liquidation expenses and fees paid to accountants or valuers etc.

Banks in India recover between 20-30% of the total credit. The top countries perform better because their system is process driven and not litigation driven. They have specialized bankruptcy courts, minimal judicial interference, strong creditor rights, fast out of court settlements and digital case management. Though IBC is a step forward, however, lack of institutional capacity and delays in judicial processes add to the poor overall efficiency leading to a magnanimous portion of assets wasted in the process and creditors recover less money. In advanced economies, there is a very low value erosion during closure proceedings due to system efficiency.

The closure delays cost businesses in terms of interest on credit, maintenance of idle assets, legal expenses, and foregone opportunity costs due to the fact that some assets may remain idle for long periods during legal processes of winding up. These costs are not compiled across all businesses as a nationwide single monetary value; however, these costs are captured in broader economic measures like Non-Performing Assets (NPAs). As per the economic survey 2025-26 Gross NPA is roughly 4.8 lakh crores. The capital which is tied up in unresolved cases and can’t be reused in productive ventures elsewhere slows growth in manufacturing or other sectors. The pending taxes, penalties and statutory dues continue to accumulate if closure is not finalized correctly. Prolonged insolvency reduces the possibility of business revival, recovery of debts and often reduces the market value of assets. The Economic Survey 2025–26 warns that delay in closure weakens financial systems by locking up productive capital that could otherwise be used for growth. The opportunity cost of locked up assets in unviable business has huge implications for the economy. Therefore, ease of closure is as important as ease of starting a new business.

The real estate alone accounts for approximately 22% of insolvency filings but has lower resolution rates compared to manufacturing due to complex creditor mixes i.e., banks and homebuyers who are as financial creditors. Since real estate is capital-intensive, delays in exit or resolution squeeze investment returns along with shrinking employment. In the Noida housing market alone, over ₹26,000 crores in dues remain tied up due to insolvency or litigation, restricting recovery of funds by authorities and creditors. Long delay leads to deterioration of asset quality, investors lose confidence and additional costs erode the recoverable value of assets. Cross country studies suggest that economies with slower exit procedures tend to have fewer new investments, technological upgradations and slower job creation.

In this context, the provision under Industrial Relations Code of no prior approval of government for industrial establishments employing less than 300 workers is a major step forward, because the provision of prior approval leads to procedural delay. The government is required to decide the application for approval of closure of establishment within a period of sixty days. However, competent authority may review its decision or refer the matter to Tribunal for adjudication. Workers are a necessary party in this and they generally resist closure for the fear of losing employment. However, experts believe that delaying closure of unviable business doesn’t lead to its revival, rather workers lose in the long run as employer fails to pay their salary and other dues in time thus increasing financial liability on business and making it less lucrative for would be investors. The prolonged uncertainty means more hardship for employees dependent on business. The implementation of Industrial Relations code will make closure easier for a large number of MSMEs. If all the laws affecting closure are implemented in the right earnest and delays are curtailed drastically, it will free large amount of unproductive assets and infuse huge amount of money in the economy with great growth potential. Early closure of inefficient businesses will also improve overall productivity and competitiveness. It will also facilitate new investment as investors prefer economies where there is ease and predictability of entry and exit. / DAILY WORLD /

( The author is a retired IAS officer reachable at nayarh@yahoo.com. )