Djankov et al.,2007;Haselmann et al., 2009). One way of lowering the costs is through
strengthening creditor rights which would lead to decline in the use of credit by ﬁrms.
Vig (2013) examined the effect of ﬁnancial reform which strengthened the creditor rights
and found that it led to reduction in secured debt,total debt, debt maturity and asset growth.
The study emphasized that strengthening creditor rights might lead to ﬁrms altering their
debt structures. Vig (2013) used the Indian economysetting for this experiment, speciﬁcally
the passing of Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interests Act, 2002 (SARFAESI).In an emerging economy like India, policymakers
have been insisting on the development of the restructuring mechanism, so that the lenders
(mostly banks) could improve the recoveryand hence the health of their balance sheets. For
understanding the extent of reformsover a period of time and how these are accepted, India
has been chosen for this study. India is a good subjectfor this study because of the ﬂurry of
reforms introduced for debt restructuring. Also, in India, banks have been a popular source
of ﬁnancing corporate activities and the market reaction to these reforms can be examined
by studying the stock market reaction of bank stocks. Sengupta et al. (2016) provide a
detailed commentary on the evolution of insolvency framework for Indian non-ﬁnancial
ﬁrms. The Companies Act, 1956 was the ﬁrst law to address corporateinsolvency for Indian
ﬁrms. Although the Companies Act, 1956 did not deal directly with insolvency and
bankruptcy code (IBC), it covered aspects of ﬁrm’s inability to pay debt and winding up
proceedings. The winding up proceedings were adjudicated by the High Court. Sengupta
et al. (2016) reported that the number of cases registered and resolved was abysmal
compared with the number of registeredcompanies in India indicating a very low usage of
the Companies Act for dealing with insolvency.
Post-independence, the Government of India took various initiatives to provide impetus
to the growth of industrial sector. A large number of companies failed, majority of these
were highly leveraged and had borrowedheavily from Developmental Financial Institutions
set up under Government initiative.In the 1980s, there was a widespread crisis of industrial
sickness which was adversely impacting the ﬁnances of banks and ﬁnancial institutions.
The Sick Industrial Companies Act (SICA) was passed in 1985 with the objective of
restructuring sick companies. A Board of Industrial and Financial Reconstruction (BIFR)
was set up as the adjudicating authority. This act covered only industrial companies and
required the board of the company to declare sickness. The mechanism under the act
provided a stay from other proceedings and claims thus providing protection to the
company and also permitted the debtor management to continue to manage the ﬁrm.
Proceedings under BIFR took an inordinate time to resolve. Even if a case was adjudicated
for winding up by the BIFR, many cases were re-examined by the High Court causing
further delay. The SICA seemed to provide more protection to the borrower rather resolve
debt recovery issuesfor the creditors.
With the intention of strengthening creditor rights, the Recovery of Debts due to Banks
and Financial Institutions Act, 1993 (RDDBFI) was enacted upon the recommendations of
the Narasimhan Committee I. Debt recovery tribunals (DRTs) and debt recovery appellate
tribunals were set up toprovide a mechanism for expeditious recovery of debt by banksand
speciﬁed ﬁnancial institutions. This act created a special classof creditors that had superior
rights over other claimants,such as operational creditors and workmen for recoveryof dues.
Recovery under RDDBFI too has not been very successful and suffered from several
weaknesses includinglow recovery rates.
The Reserve Bank of India (RBI)set up the Corporate Debt Restructuring (CDR) Scheme
in 2001 to provide debtors and creditors a mechanism for out of court settlement of dues
where outstanding dues were more than INR100m. The CDR scheme comprised of a three-