The Hindu Business Line : Centre to re-model laws on winding up sick units

Frictions faced in the creation and closure of firms in response to normal competitive market dynamics has been highlighted in the Economic Survey 2003-04 as one of the major constraints, which appear to play a prominent role in influencing industrial growth today.

Commenting on the steps taken for resolution of failure, the Survey says that with globalisation of trade and opening up of the economy, the Centre had decided to re-model the laws relating to winding up of companies in tune with international practices in this field.

At present, the winding up process is slow and the experience with the Board for Industrial and Financial Reconstruction (BIFR) for speedy revival of the company has not been encouraging, it observed.

"Hence, the Government has enacted the Companies (Second Amendment) Act 2002, which provides for the establishment of a National Company Law Tribunal (NCLT) with benches in several States to decide the question of rehabilitation and winding up of sick companies," said the Survey. The Act places in position a modern, efficient and time-bound Insolvency Law to provide for both rehabilitation and winding up of sick companies within a period of two to three years, at the maximum.

Since its inception in May 1987 and till the end of March 2004, BIFR received 6,349 references under the Sick Industrial Companies (Special Provisions) Act, 1985. NCLT, as and when set up, is to be vested with the powers currently exercised by the Company Law Board, BIFR and the Appellate Authority of Industrial and Financial Reconstruction, and high courts regarding winding up of companies and amalgamation scheme.

Further, for upholding competition in the domestic market, the Government has enacted a new law, the Competition Act, 2002.

The main objectives of the Act are to provide for establishment of a Competition Commission of India (CCI) to prevent practices having adverse effect on competition, to promote and sustain competition in the domestic market, and protect consumer interests. The role of the commission is to ensure freedom of trade carried on by participants in the market for related matters.

The Survey also points that one factor impeding the credit flow into industry has been the mechanism used when a borrowing firm fails. The likelihood of poor credit recovery, in such an event, has led to symptoms like high interest rates and `credit rationing'. This has affected entrepreneurship and investment.

According to the Department of Public Enterprises, as on March 31, 2004, there were 227 Central public sector undertakings (CPSUs) operating in the country. Out of this, 68 sick industrial CPSUs have been registered with BIFR.

In recent years, there has been a sustained effort on evolving better institutional mechanism and legal framework to improve credit recoveries and thus spur the credit flow into industry.

These efforts include the Debt Recovery Tribunals, the Corporate Debt Recovery Tribunals, the Corporate Debt Restructuring and the Securitisation, Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

On the issue of modernisation and privatisation of sick PSUs, the Survey states that "while every effort will be made to modernise and restructure sick PSUs and revive sick industry, chronically loss-making companies will either be sold off, or closed after all the workers have got their legitimate dues and compensation. The United Progressive Alliance Government will induct private industry to turnaround companies that have potential for revival."

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