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Step one to resolve insolvency

 MPost |  2016-05-07 19:20:42.0  |  New Delhi

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.

 One of the highlights of the Bill is the creation of a database of serial defaulters. All these elements are critical in resolving India’s bad debt problem, which has left our banking sector in tatters. 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. The 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. 

“Banks grappling with stressed assets, particularly in sectors such as real estate and infrastructure, are set to get a freer hand in recovering their dues before the value of their investments deteriorates too much,” according to the Financial Express. G Srinivasan, a senior analyst on economic affairs, has also written about some its key benefits for Millennium Post.

“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,” said Srinivasan.  

The new Bill has also sought to protect worker’s interests in the event of a default. “To protect workers’ interests, the committee proposed that the money due to workers and employees from the provident fund, the pension fund, and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual,” according to Mint. “Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.” 

The creation of information utilities that would provide creditors with information about borrowers in “almost real time” is another key aspect. Information shared will include how much money has been borrowed. And these utilities will be regulated by a bankruptcy board. With such information utilities on board, banks will have an easier time detecting bad apples among debtors. In a significant addition to the Bankruptcy Bill after it was referred to a joint committee of Parliament, India will now forge cross-border treaties to get access to defaulters' offshore assets. 

This could prevent willful defaulters like Vijay Mallya, among others, from hiding behind their offshore assets. However, the real success of this bill lies in how it simplifies the insolvency process. From 12 laws, some of which were more than a 100 years old, to tackle insolvency, India could have just one law. Coherence and simplicity are the two virtues that businesses seek in a nation’s laws. Without these features, there is little incentive for businesses to invest here. 

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. As per the World Bank’s findings, it takes more than four years to resolve bankruptcy in India. The new Bill seeks to reduce this time frame to less than a year. In an unfortunate reflection of our banking sector, India has also 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 its 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. But the success of such legislation will depend on its execution. For example, India has one of the strongest laws on the environment. But are these laws executed in a comprehensive manner? If recent events are anything to by, the answer is no.    

 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 still 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 economic reforms such as GST and the Bankruptcy Bill are passed.
 

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