Economy & Finance

ED Flags Insolvency Code Frauds and Disproportionate Haircuts by Banks

16 September 2026UPSCBank

In Brief

Enforcement Directorate identifies fraudulent insolvency practices and excessive bank haircuts under the IBC framework as major focus areas.

The Enforcement Directorate (ED) has formally flagged fraudulent practices, asset siphoning, and disproportionately high financial haircuts taken by lenders under the Insolvency and Bankruptcy Code (IBC) as major focus areas for investigation. The financial investigation agency highlighted that certain corporate debtors manipulate the insolvency process to clean bad debts while retaining control through proxies.

Enacted in 2016, the IBC was designed to streamline resolution processes for distressed companies, maximize asset recovery, and protect financial creditors. However, recent corporate resolutions under the National Company Law Tribunal (NCLT) have seen banks accepting haircuts exceeding 80% to 90% in several high-profile cases, sparking intense debate regarding systemic loopholes and creditor value destruction.

The ED’s intervention targets cases involving forensic audit red flags, round-tripping of funds, and money laundering disguised as corporate insolvency. By coordinating with the Insolvency and Bankruptcy Board of India (IBBI) and the Reserve Bank of India, enforcement authorities plan to scrutinize resolution applicants, resolution professionals, and promoter networks linked to fraudulent defaults.

This operational focus is critical for financial and civil service exams. UPSC Prelims can test concepts related to IBC provisions, NCLT hierarchy, IBBI powers, and terms like haircuts and resolution plans. In Mains GS Paper III (Economy), it offers critical context for questions on non-performing assets (NPAs), corporate governance failures, and structural banking reforms.

UPSC Study NotesHIGHGS3 — Economy & Finance

GS3 — Economy & Finance

📌 Exam Angle

Prelims: Expect MCQs on IBC framework, NCLT jurisdiction, haircut definitions, and IBBI's regulatory role. Mains: Essay-style questions on "Structural failures in India's insolvency framework" or "How can corporate governance be strengthened under IBC?" with emphasis on ED's forensic findings and creditor protection mechanisms.

⚠️ Key Concerns

The news highlights systemic loopholes where promoters exploit IBC to clean bad debts while retaining control through proxy ownership—defeating the code's original intent of asset maximization. Disproportionate haircuts (80-90%) indicate either weak creditor negotiations, collusive resolutions, or undervaluation of assets, raising questions about NCLT oversight and resolution professional accountability.

💡 Why It Matters

This signals India's need to strengthen IBC implementation post-2016 to prevent financial sector erosion and restore investor confidence. ED's multi-agency coordination (with IBBI and RBI) demonstrates government's commitment to tackling money laundering and corporate fraud disguised as legitimate insolvency.

🔑 Must Remember

• ED targets fraud, asset siphoning, and round-tripping under IBC's resolution process • Haircuts exceeding 80-90% indicate systemic creditor value destruction and weak NCLT scrutiny • Promoter proxies allow defaulters to retain control post-resolution, violating IBC's restructuring spirit

📝 Key Terms

Insolvency and Bankruptcy Code (IBC)NCLTIBBIhaircutsresolution professionalsnon-performing assets (NPAs)corporate governanceasset siphoningmoney launderingfinancial creditorsround-tripping

ED Flags Insolvency Code Frauds and Disproportionate Haircuts by Banks

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