With the twin objectives of improving the ease of doing business in India and ensuring better debt recovery to creditors, the bankruptcy code is designed to make it easier for sick companies to either quickly wind up their business or craft a turnaround and for reluctant investors to exit with at least a little of their sunk cost.
The markets responded very well to the legislation. Both the indices, Sensex, and Nifty, snapped their two-week losing streak on fresh buying mainly in banking sector buoyed by the passage of bankruptcy bill by the government in the Parliament. In the past, this column had written about the benefits of such legislation.
“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.” The code will strengthen the hands of lenders to recover outstanding debts by setting a deadline of 180 days for companies to pay or face liquidation.
Banks are currently facing Rs 3.61 lakh crore bad loans as on December 2015. The new Bill has also sought to protect employee interests in the event of a default. “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.”