AMERICAN PERISCOPE. Ends and means

As businessmen know, and politicians rarely understand, the inability to exit from a failing business can be a big damper on investment and risk taking. Look at the dismal French data on business creation and you will see the footprints of their laws that have made it difficult to exit business, change work rules or layoff staff.

The US is a pioneer when it comes to dealing with bankruptcy. Chapter 7 deals with liquidation and Chapter 11 with reorganisation. Already liberal, when its bankruptcy code was revised in 1978, it was made unnecessary for a business to show that liabilities were greater than assets to file for reorganisation.

Thus, the conventional stigma associated with bankruptcy and market reputation changed to that of reorganisation and restructuring by a company in difficulty. By filing under Chapter 11 of the Bankruptcy Code, a company seeks the protection of the court from debtors. The company has to file a recovery plan that a debtors committee will have to approve; the management continues to run the business, and fresh loans can be made to the company that receive superior debt status.

The process generally lasts one and half years, and creditors recover about 80 per cent of the money. The casinos owned and controlled by Donald Trump, the presumptive Republican Party nominee for the US presidency, have filed under Chapter 11 four times to restructure their debt obligation while retaining control of the casino.

While not there yet, the new changes to the Indian bankruptcy laws that were approved in parliament would provide some protection to debtors and ease bankruptcy in India.

The Insolvency and Bankruptcy Code Bill sets up a time bound plan — 180 days to resolve the issues of a defaulting firm and another 90 days if 75 per cent of the creditors agree on the revival plan. Otherwise, the firm gets liquidated. There is jail time for concealing property or defrauding creditors. World Bank estimates suggest that, prior to this law, the process usually takes about four years in India and debtors recover only about 26 per cent.

The new law would give employees first right followed by secured creditors in the resolution process. It is also aimed at bringing under one framework the various disparate rules and regulations under different laws.

The new law has boosted another kind of business already. Global investors, who are into debt resolution and asset reconstruction, have taken note of the new opportunities in Indian failure’. They buy distressed debt, gain control of the firm, and either try to revive it or recover more from the breakup. The government disclosed that the top 50 defaulters of public sector banks owed ₹1.21 lakh crore as of December 2015. The IMF estimates that 40 per cent of corporate debt in India is at risk. Thus, there is enough business to go around.

To further the objectives of business creation, the government needs to now re-examine the labour laws in the country. That would certainly boost the ‘Make in India’ campaign.

The new bankruptcy regulations should now give a further boost to entrepreneurial activity and encourage many more individuals to get into angel and venture funding.

The writer is a professor at the Jindal Global Business School, Sonipat, and at Suffolk University, Boston

COMMENT NOW