How Process Reforms Deliver Efficiency

Large numbers of process reforms have been done in recent years- including simplification of administrative processes, changes in regulations, removal of obsolete laws, closure of outdated government entities and so on. Even if these changes appear small in many cases, they have led to significant efficiency gains in the overall system. In this article, we illustrate the impact of process reforms in the area of voluntary liquidation of companies.

The bulk of companies that shut down worldwide every year are voluntary, rather than due to involuntary causes such as bankruptcy. In India, there are two main routes for voluntary liquidation. One is under Section 248(2) of the Companies Act, 2013 and the second is Section 59 of the Insolvency and Bankruptcy Code. For both, the process was very complicated and time-consuming until very recently as was pointed out in Economic Survey 2020-21 and 2021-22. The process reforms carried out since then have completely changed the outcome.

The companies could apply for voluntary liquidation to the Registrar of Companies (RoCs) under Section 248(2) after extinguishing all assets and liabilities, provided they do not have any litigation. Despite this, it used to take 499 days on an average to close a company until 2021-22. Upon investigation, it was found that there were various obstacles such as long-time taken by RoCs to publish notices of closure in the newspaper, no fixed timelines for each step, multiple demands of document resubmissions, delays in getting response from external departments and regulators. Importantly, most of the delay was due to notices not being published in newspapers/gazette on time.

So, to begin with, the key issue was resolved- with notices being published weekly or fortnightly. This itself reduced the average time of disposal of applications from 499 days in 2021-22 to 195 days by 2022-23.

Next, Ministry of Corporate Affairs set up a Centralized Processing for Accelerated Corporate Exit (C-PACE)- the exclusive authority responsible for handling the entire strike-off process. This is a transparent system with no physical interface with applicants. Now, timelines have been fixed for each step, nodal officers from each department have been identified, number of resubmission requests by RoCs has been limited.

The results of these changes have been dramatic. The average time taken for striking off of cases filed under this system reduced to only 90 days in 2023-24 and further to 60 days in 2024-25. This is 88% reduction when compared to 2021-22. This is even better than what was envisaged when C-PACE was announced, which was getting the processing time to under 6 months.

Similarly, the time taken under Section 59 of IBC was also much longer than stipulated. Although the numbers are small, this route is important as it deals with large cases. As on December 2021, 1115 cases had been filed. Out of the total, final reports had been received for 49% cases (546) and the final order of dissolution was passed for only 25% cases. Out of the ongoing cases- 35% were on for more than 2 years and another 18% were ongoing for one to two years.

The delays were happening on various accounts- getting No Objection Certificate (NoCs) from various departments like Income Tax, lack of standard procedures for granting NoCs, varying requirements by different NCLT benches, opening of liquidation bank accounts and so on. The most important issue which used to prolong the process was the practise of seeking a NOC from the various departments by liquidators, even though the Code and Regulations had not mandated it.

To address this, first a clarification was issued by IBBI in November 2021 stating that there is no requirement of NOC from the Income Tax Department. Second, Voluntary Liquidation Regulations were amended in April 2022- brining a requirement of submitting a compliance certificate (called as Form H) along with the final report. This is a checklist which enabled faster processing of cases by the Adjucating Authority.

The result have clearly begun to show. As on December 2024, 2133 cases were initiated for voluntary liquidation. Out of the total cases, final report has been submitted for 75% cases, 54% cases have been closed by dissolution with the rest 21% are at the NCLT level. Contrast this with final reports submitted for 54% of cases and final orders for dissolution passes for only 25% cases as of December 2021. Only 101 companies were closed by dissolution in 2021, whereas the number had increased to 423 in 2024 respectively.

Thus, process reforms have created system defaults that now allow normal cases to simply pass through without delays. This case study can now serve as an example that can be used for many other government processes.

Sanyal and Arora are Member and Joint Director respectively at Economic Advisory Council to PM. Views are personal.