Why Firms Reduce Debt: Insights from India’s Bankruptcy Framework and Institutional Environment

Debt financing, Corporate deleveraging, IBC Code, Bankruptcy Costs, Institutional Environment, financial system

Over the past two decades, Indian firms have exhibited a consistent trend of corporate deleveraging, marked by a gradual reduction in reliance on debt financing. This article explores the underlying drivers of this shift, focusing on the rising significance of bankruptcy costs and persistent institutional constraints within the Indian financial system. While traditional capital structure theories emphasise the benefits of leverage, the Indian experience reveals a more cautious corporate approach shaped by legal reforms, credit market frictions, and heightened perceptions of financial distress. By examining real-world corporate cases and broader financial developments, the article argues that deleveraging in India is not merely cyclical but structural in nature. The findings highlight the need for a balanced financial ecosystem that supports both stability and growth, while also offering insights for policymakers and corporate decision-makers navigating an increasingly risk-aware environment.