Hastening bankruptcy

If the Bankruptcy Law Reforms Committee, which submitted its final report last week, has its way, then the country will, for the first time, have a comprehensive Bankruptcy Code that brings it on a par with the developed world. India ranks a pathetic 136 in a list of 189 countries in the matter of quick and efficient resolution of insolvencies, going by the latest rankings by the World Bank. Considering that it takes on average 4.3 years to resolve insolvencies in India (compared to 1.7 years in the developed world) and lenders recover just about 20 per cent of their loans when businesses go under (against over 70 per cent in the rich countries), India’s poor ranking is not surprising at all. As the report notes, creditors traditionally have held only limited power in the event of default by a company whose promoters continue to stay in control. Kingfisher Airlines is just one example of this.

The proposed Code will not only hasten the process of insolvency proceedings but also put more powers in the hands of creditors, thus creating a balance with borrowers. Importantly, unsecured creditors will be treated on a par with their secured brethren in the committee of creditors that will decide the fate of the firm. Further, in a move that will protect labour interests, even operational creditors such as employees and utilities with dues can initiate insolvency proceedings when the borrower defaults. The Committee has rightly focussed on speed as the main essence of insolvency proceedings and has, therefore, set a 180-day limit for the creditors’ committee, which will have representation of all lenders in proportion to their advances, to decide one of three alternatives — liquidation of the company, sale of the company as a going-concern, or restructuring of debt. Borrowers cannot hold the process to ransom because if three-fourths of the creditors are unable to agree on one of the three options within the 180-day period, then the liquidation process will automatically commence. This is indeed a very sensible suggestion even if it may seem harsh to some businessmen.

The absence of a rational and efficient process of insolvency for corporates has inhibited the development of a vibrant corporate bond market. Individual lenders have opted to stay away from corporate bonds given the risks involved and corporate lending has tended to largely be the preserve of banks. Capital and assets have been locked up and wasted in enterprises that have gone under with little prospects of a revival. These impose significant costs on the economy, both direct and indirect, as potential investors are put off by the absence of an efficient exit process. The Committee’s recommendations envisage repeal of some laws that now govern insolvency and also harmonisation of regulations present under different statutes into a single Bankruptcy Code to be governed by a new regulator. The Centre should endeavour to get parliamentary approval quickly for this significant piece of reform.

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