Impact of bankruptcy law on foreign investments in distressed firms: evidence from a quasi natural experiment

We examine the influence of bankruptcy law on the foreign institutional shareholders in Indian firms. Using a sample of 15,268 firm-year observations from 2003 to 2023, we employ Tobit and Logit regression models within the difference-in-difference framework to investigate the impact of the insolvency and bankruptcy code (IBC) of 2016 and financial distress on the shareholding of the foreign institutional investors (FIIs). We report that introduction of the IBC leads to reduction in the intensity and propensity of equity holding of FIIs. Further, this decrease is more pronounced in the distressed firms. Our study offers insights to the policy makers and regulators to identify ways to attract FIIs, post the implementation of IBC since better creditors' rights create conducive regulatory environment for creditors, it could repel the equity investors, especially outside foreign investors.