Increasing the chances of the long-delayed Bankruptcy Code securing parliamentary assent in the current session, a joint committee of both Houses has fine-tuned the code, deferring to different political parties. Finance minister Arun Jaitley said on Wednesday: “The code has been cleared by the standing committee and is likely to be discussed in the current Budget session of Parliament.”
The code, touted as a big reform initiative to boost the ease of doing business, would help expedite unlocking of distressed corporate assets and boost creditors’ ability to recover debts before they are truly sunk. It will be supplemented with the requisite institution building (the National Company Law Tribunal in the main) and creation of a pool of insolvency professionals. 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.
As per a World Bank report, it takes about 12 years to liquidate a company in India (compared with one to three years in developed countries) and liquidation fetches the investor just 16 cents for every dollar invested. Only 20% of bad debts are recovered by banks under the current regime. The code suggests a tight time frame of 180 days for liquidation of bankrupt firms, extendable by a maximum of 90 days.
Among the major changes that the code — which will subsume many existing laws including the Sick Industrial Companies Act — would bring are the following: Making decision of the majority of the lenders binding on other lenders and defaulting promoters; allowing unsecured creditors to initiate liquidation and loan restructuring; and giving unsecured creditors precedence over others except secured lenders when it comes to laying hands on the liquidated firms’ assets. These steps, analysts said, would help expedite the recovery of bad debts and give a boost to collateral-free debt funding by private equity funds and venture capital firms, infrastructure funding and the corporate bond market.
The code was introduced in the Lok Sabha in December 2015. Although there were rumours that it would be treated as a money Bill for its smooth passage (given the ruling alliance’s lack of majority in the Upper House), the government opted not to do that. Instead, the code was sent to the panel comprising members from both Houses to reach a consensus on the various provisions.
In fact, the Companies Act, 2013, which came into being when the UPA was in power, includes a chapter on insolvency providing for, among other things, secured creditors to be consulted and involved in the concerned firm’s management and initiate restructuring/liquidation. But these provisions have remained inoperative thus far as the necessary rules have not been notified.
Delhi-based insolvency expert Sumant Batra said: “The timelines proposed in the code are unrealistic and impractical. It will take at least 5-10 years to establish the institutional infrastructure for a modern
bankruptcy regime and another 10 years for them to achieve the standards of the counterparts in the developed countries.”