Bankruptcy Bill passed: Big reform focused on ease of doing business

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New Delhi | Updated: May 6, 2016 7:50:30 AM

The Lok Sabha on Thursday cleared the Insolvency and Bankruptcy code 2016, touted as a big reform initiative to improve the ease of doing business by helping speed up unlocking of distressed corporate assets and boosting creditors’ ability to recover debts before they are truly sunk.

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The Lok Sabha on Thursday cleared the Insolvency and Bankruptcy code 2016, touted as a big reform initiative to improve the ease of doing business by helping speed up unlocking of distressed corporate assets and boosting creditors’ ability to recover debts before they are truly sunk.

The Lower House cleared the code with the amendments recommended by the joint committee of Parliament after the government accepted them, increasing chances of its passage in the Rajya Sabha, too (where the ruling NDA is in minority), as the panel comprised members of both the Houses.

This code, which will subsume many existing laws, including the Sick Industrial Companies Act, and become the overarching law to address corporate insolvency, provides for requisite institution building (the National Company Law Tribunal in the main) and creation of a pool of insolvency professionals. The Insolvency and Bankruptcy Board of India will be set up, which will act as a regulator for these 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.

Analysts say if the law is enacted by the end of this month, it would help India improve its rankings in the World Bank’s ease of doing business index, where it is placed at 130. This is because in resolving insolvency, India is placed at 136 among 189 countries of the index. As per a World Bank report, it takes about 12 years to liquidate a company in India (compared to 1-3 years in developed countries) and liquidation fetches the investor just 16 cents for every dollar invested.

Replying to a debate in the Lok Sabha, MoS for finance Jayant Sinha called the law “transformational”. “There were 12 laws, some of which were more than 100 years’ old, to tackle insolvency and now there will be one law. We will be able to quickly move up the World Bank rankings,” he said.

Varun Gupta, partner (Deal Advisory) at KPMG India, said the Bill “should go a long way in speeding up the resolution process for stressed assets in the country”. He, however, added: ”There is a significant amount of work still to be done in creating the insolvency practitioners ecosystem, the tribunals and the operating guidelines over the next few months, but boards of companies will have to start re-examining how they deal with all classes of creditors once the code comes into place.”

Delhi-based insolvency expert Sumant Batra: “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.”

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