Is Section 29A Now Hurting India’s Insolvency Regime More Than Helping It?

When India’s first resolution plan under the Insolvency and Bankruptcy Code (IBC) was approved in August 2017, it shook confidence in the country’s new insolvency architecture. A related party regained control of the company while creditors absorbed a staggering 94% haircut. What was meant to be a market-driven rescue mechanism appeared to have become a loophole for errant promoters to cleanse balance sheets and reclaim assets. The legislative response — Section 29A — was swift and uncompromising. Nearly a decade later, however, the context has changed, raising a difficult but necessary question: does Section 29A still serve the IBC’s core objective of value-maximising resolution, or has it become an obstacle to it?

Why Section 29A was introduced

Section 29A was inserted into the IBC in 2018 to address a clear moral hazard. The law could not permit promoters who had driven companies into insolvency — often through mismanagement or diversion of funds — to regain control at steep discounts. The provision barred a wide category of persons, including defaulting promoters and connected parties, from submitting resolution plans.

At that moment, the intervention was justified. India was grappling with a severe twin balance-sheet crisis, banks were weighed down by stressed assets, and confidence in credit discipline was fragile. Section 29A restored credibility by drawing a bright line between resolution and reward for failure.

The changing insolvency landscape

Nearly ten years on, the economic landscape looks markedly different. The acute phase of the banking crisis has eased, credit discipline has strengthened, and the IBC has matured through judicial interpretation and institutional learning. Yet Section 29A remains largely frozen in its original, maximalist form.

This rigidity is most visible in clause (c), which disqualifies a promoter from bidding for a company if any of their accounts has been classified as a non-performing asset for at least one year prior to the commencement of insolvency proceedings. The disqualification hinges not on fraud or misconduct, but on classification and timing.

How clause (c) produces perverse outcomes

Clause (c) creates anomalies that sit uneasily with commercial logic. A promoter with multiple companies burdened by large NPAs can continue to control them indefinitely, so long as none enters the corporate insolvency resolution process (CIRP). By contrast, a promoter with a single company — even with a relatively small NPA — is permanently excluded if that company is admitted into CIRP.

The trigger is not culpability, magnitude of default, or persistence of stress, but the happenstance of insolvency admission — an outcome often shaped by creditor strategy rather than promoter conduct. Worse, the provision disqualifies those with modest bank defaults while allowing those with large, long-standing defaults to non-bank creditors to remain eligible. The law thus privileges form over substance, classification over conduct.

Ignoring the reality of business cycles

At a deeper level, clause (c) ignores how markets actually function. NPA classification often reflects systemic or sectoral shocks rather than promoter delinquency. Entire industries — notably thermal power and steel — were pushed into distress in the mid-2010s due to coal block cancellations and a global steel price collapse, factors largely beyond managerial control.

Business failure is not an aberration in a market economy; it is a feature. If insolvency law cannot distinguish between honest failure and fraud, it risks chilling entrepreneurship. A one-year NPA threshold is particularly arbitrary in cyclical industries, where recovery horizons rarely align with regulatory timelines. The Covid-19 pandemic only reinforced this reality — a shock so severe that the law itself excluded pandemic-era defaults from triggering insolvency.

Value destruction through exclusion

By excluding promoters purely on the basis of NPA duration, Section 29A often removes the stakeholder with the deepest institutional knowledge of the distressed asset. Strategic buyers may lack appetite for complex turnarounds, while financial investors may lack operational expertise. The frequent result is a failed resolution process followed by liquidation — the worst possible outcome for creditors and workers alike.

The breadth of disqualification compounds this effect. Section 29A extends not only to promoters but also to persons acting in concert and “connected persons”. Intended to prevent proxy bidding, this wide net has deterred genuine white knights. A prospective investor partnering with a promoter risks becoming globally disqualified if that promoter attracts ineligibility at any point, shrinking the pool of resolution applicants across the system.

The MSME exception exposes the flaw

The law itself acknowledges the problem through Section 240A, which exempts micro, small and medium enterprises from the rigours of clause (c). By allowing MSME promoters to re-enter despite NPA status, Parliament implicitly recognises that NPA classification is not a moral verdict.

This creates a jurisprudential inconsistency. If failure in MSMEs can be contextual and deserving of a second chance, the same logic should apply to large enterprises. Moral culpability cannot reasonably depend on balance-sheet size. A steel plant promoter hit by global shocks is no less deserving of a conduct-based assessment than a small manufacturer.

Over-inclusive and under-inclusive at once

Clause (c) illustrates a larger problem with Section 29A: it is simultaneously over-inclusive and under-inclusive. It excludes promoters guilty only of misfortune while allowing potentially culpable actors to remain eligible until wrongdoing is conclusively established. Clauses dealing with wilful default or avoidance transactions disqualify only after final determinations, meaning suspect actors may still participate during the process.

The result is a regime that sometimes punishes the unlucky and accommodates the questionable — the opposite of what insolvency law should achieve.

Calibration, not dismantling, is the answer

This is not an argument for rolling back Section 29A or returning to an era of promoter impunity. Moral hazard is real, and the law must continue to bar those who have stripped assets or acted fraudulently. But exclusion must be calibrated, not blunt.

Promoters with credible evidence of misconduct should be barred at the threshold. Those who have suffered honest business failure, retain creditor confidence, and possess the capacity to revive assets should not be treated as pariahs. The IBC’s promise lies in maximising value, not in symbolic punishment.

What the IBC needs next

Section 29A was a necessary intervention at a particular moment in India’s financial evolution. Today, the challenge is subtler: curbing misconduct without extinguishing value. The next phase of insolvency reform must sharpen the distinction between fraud and failure, discipline and over-deterrence, moral culpability and commercial misfortune.

Only through such calibration can the IBC fulfil its original purpose — not merely to punish past failure, but to rescue viable enterprises and preserve economic value.