India has often been in the
limelight for archaic laws in relation to bankruptcy.The World Bank reckons that it takes more than four
years to wind up an ailing company in India, almost twice as long as it does in
China. The recovery of debts, too, is stuck at just 25.7 cents on the dollar,
among the worst in emerging economies. Currently, there is no law dealing
with insolvency and bankruptcy in India.Nearly 60,000 bankruptcy cases languish in India's overburdened courts. In
India, even the pursuit of bankruptcy is an agonizing affair.
Cases such as the protracted
collapse of liquor tycoon Vijay Mallya’s Kingfisher Airline Empire have burnt
investors. The airline was grounded in 2012 with some $1.5 billion in debt and
its shares are now worthless, but creditor banks seized his former Mumbai
headquarter in 2015.The NDA government has tried to amend the current scenario by introducing a bankruptcy law that will allow a smooth and quick shutdown of unviable companies. It is a welcome move which can dramatically improve India’s rank in the Ease of Doing Business stakes.As per the recent Doing Business, 2015 Report, India is ranked 142 on the ease of doing business and at 137 for resolving insolvencies.
What is Bankruptcy bill?
The bankruptcy bill aims at promoting investments, freeing up banks’ resources for other productive uses, boosting credit markets and improving ease of doing business in India.
An effective legal framework for timely resolution
of insolvency and bankruptcy would support development of credit markets and
encourage entrepreneurship. The bill also provides for setting up of an
‘Insolvency and Bankruptcy Board of India’ to regulate professionals, agencies
and information utilities engaged in resolution of insolvencies of companies,
partnership firms and individuals. The Code also proposes to establish a fund
called the Insolvency and Bankruptcy Fund of India.
As per the
proposed legislation, the corporate insolvency would have to be resolved within
a period 180 days, extendable by 90 days. It also provides for fast-track
resolution of corporate insolvency within 90 days.
The connection between better insolvency laws and economic growth is straightforward
- stronger bankruptcy laws protect
the rights of borrowers and lenders, promote predictability, clarify the risks
associated with lending and make the collection of debt through bankruptcy
proceedings more attractive. This will boost Foreign and domestic investments as
the difficulty in exiting ventures that deter them from entering is ruled out. These factors ultimately
facilitate credit and thus a higher flow of capital in the economy.
However,
the government will have to muster support in both houses of Parliament to get
things done. India has many shades of red in Parliament, and skeptical
lawmakers need to be convinced to enable legal changes,
A proactive move
to build a consensus may aid a faster march to an insolvency regime that India
can be proud of. This requires not just political will, but considerable
legislative tact. A slow bleeding of ailing companies aids no one, be it
employees, bankers, shareholders or promoters. Hence, it is rightly said that
Capitalism without bankruptcy is like Christianity without hell.
- Mahima Rastogi
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