PSUs and Insolvency

Why It Matters

Ambiguities around sovereign‑function exemptions risk undermining the IBC’s credibility and could leave lenders exposed, while delaying resolution of distressed PSEs hampers fiscal consolidation and essential service delivery.

Key Takeaways

• CNNL insolvency order stayed by courts, reviving PSE debate.
• Supreme Court exempted NHAI from IBC resolution.
• Half of 1,107 PSEs loss‑making; losses $13.7 bn.
• Electricity distribution debt totals $85 bn, raising solvency concerns.
• Clarifying sovereign‑function definition crucial for creditor rights.

Pulse Analysis

The Insolvency and Bankruptcy Code was introduced to provide a time‑bound, creditor‑driven pathway for corporate distress, yet public sector enterprises (PSEs) have repeatedly tested its boundaries by invoking sovereign functions. The recent stay on CNNL’s insolvency case illustrates how courts become arenas for interpreting whether a state‑owned entity’s public duties shield it from the Code’s mechanisms. This legal tug‑of‑war not only stalls resolution timelines but also creates uncertainty for vendors and lenders who rely on predictable outcomes under the IBC framework.

Financial data underscores why the issue matters. The 16th Finance Commission reports that 541 of 1,107 PSEs are loss‑making, with cumulative deficits of roughly $13.7 billion for the fiscal year 2022‑23. In the electricity distribution sector alone, debt has ballooned to about $85 billion, reflecting chronic under‑investment and tariff shortfalls. Such fiscal stress pressures governments to consider asset monetisation, privatisation, or, paradoxically, to shield entities from insolvency to avoid political fallout, thereby compromising fiscal discipline and public‑service continuity.

Legal scholars argue that the IBC’s ownership‑neutral language should prevail, but the Supreme Court’s NHAI exemption signals a potential carve‑out for entities performing essential public functions. Clarifying the definition of "sovereign function" is essential to align creditor rights with public interest. Proposed reforms include a statutory amendment that delineates specific sectors where exemption applies, coupled with a fast‑track resolution mechanism for PSEs that meet clear financial distress criteria. Such clarity would restore confidence among investors, reduce litigation costs, and ensure that essential services are not jeopardised by protracted insolvency battles.