Bankruptcy code, bad loans

In an important announcement on Wednesday, Finance Minister Arun Jaitley said that the Joint Parliament Standing Committee has cleared the Bankruptcy and Insolvency Code. It is likely to be discussed in the current Budget Session of Parliament. Speaking to a government-appointed committee, Jaitley said that the bankruptcy law will be introduced in the Lok Sabha to deal with the problem of mounting bad loans in the banking sector. “The Bankruptcy Law has been cleared by the Joint Parliament Standing Committee and the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act and Debt Recovery Tribunal (DRT) Act have been amended to make the recovery process more efficient and expedient,” he said. As far as its contents are concerned, the Bill presents the political class with the requisite legislative tool to tackle wasteful defaulters, who have raised the cost of borrowing money for the common man. If enacted into law, the government can ensure quicker resolution of bad loans, through a formal insolvency process of the defaulting business.

The passage of both the bankruptcy code and the goods and services tax bill though Parliament will boost to the government’s reform plans, even in an otherwise weak global scenario. But with the Uttarakhand fiasco and the Agusta Westland corruption scandal taking precedence, one is not sure whether the bill will see the light of day in this session. With the twin objectives of improving the ease of doing business in India and ensuring better debt recovery to creditors, the intended bankruptcy code is designed to make it easier for sick companies to either wind up their business or craft a turnaround and for reluctant investors to exit with at least a little of their sunk cost. It will cover individuals, companies, limited liability partnerships (LLPs), partnership firms and other legal entities registered in India as may be notified, except for those with a dominantly financial function. Interestingly, the draft Bill lays down a clear, coherent and speedy process for early detection of financial distress and revival of companies and limited liability entities if the underlying business is found to be viable. In a recent column for this newspaper, G Srinivasan, a senior analyst on economic affairs, wrote about some of the key benefits of such a law.

“It prescribes a swift process and timeline of 180 days for dealing with applications for insolvency resolution. This can be extended for 90 days by the Adjudicating Authority only in exceptional cases. During insolvency resolution period (of 180/270 days), the management of the debtor is placed in the hands of an interim resolution professional/resolution professional. An insolvency resolution plan prepared by the resolution professional has to be approved by a majority of 75 percent of the voting share of the financial creditors. Once the plan is approved, it would require the imprimatur of sanction of the Adjudicating Authority (AA). If an insolvency resolution is rejected, the AA will make an order for the liquidation,” Srinivasan wrote. 

Although the Modi government and has done a reasonable job of making it easier for businessmen to start a new enterprise, India is still notoriously slow and cost ineffective in shutting down sick business ventures. It is precisely why India needs a new bankruptcy law to deal with this scenario. In an unfortunate reflection of our banking sector, India has slipped six spots in accessing credit to 142 out of 189 countries, according to the World Bank’s Ease of Doing Business index. In other words, it has become much more difficult to get credit in India. According to the World Bank report, just 25.7 cents are recovered from every dollar invested in a failed Indian venture. In comparison, China recovers 36.2 cents, while Japan tops the list with 92.90 cents on the dollar. The pathetic state of balance sheets, especially among public sector ones, is probably because the Indian banking system has been regularly taking haircuts: the difference between the market value of an asset used as loan collateral and the amount of the loan. What’s worse they have been extending repayment periods and giving loans to sick private sector companies.

Although the Modi government has been successful in implanting better administrative rules, substantial structural changes to the economy have not been forthcoming. The Goods and Services Tax (GST) Bill, for example, is stuck in the Rajya Sabha. It is considered to be the most important tax reforms since independence. Intended to subsume many of the central and state indirect taxes, the GST is expected to transform the tax structure in the country. An ambitious overhaul of India’s labyrinth of indirect taxes which is what the GST attempts to do would give business enterprises across the country a boost while also encouraging transparency.  One hopes that the current impasse in Parliament comes to an end soon so that key reforms are passed.