Given the bad-loan crisis that grips the banking sector, the Bankruptcy Code brings greater certainty and speed with regard to filing, processing and resolution of bankruptcy pleas. It also addresses the concerns of both creditors and debtors by creating a level playing field.

The code provides banks with much-needed muscle to deal with NPA accounts; it enables them to realise the maximum value out of an asset once a firm is declared bankrupt.

It imposes jail terms of up to five years for asset-stripping of insolvent companies and mandates companies’ liquidation if an insolvency process is not resolved within 180 days.

Apart from this, a new class of insolvency professionals will help sick companies and banks with smooth liquidation. The code aims to consolidate the plethora of insolvency laws in force today and bring them under one overarching umbrella.

A regime of fast insolvency and bankruptcy resolution is imperative for the Indian banking system, given the legal and institutional machinery for dealing with bad debt has had limited success.

According to the World Bank, establishing corporate insolvency in India takes more than four years, compared with just six months in Japan, eight months in Singapore, one year in UK, 1.5 years in the US and 1.7 years in China.

The recovery rate of creditors is also very low—only 25%, compared with 77% in high-income nations. India also ranks poorly in the World Bank’s insolvency ratings, 136th among 189 countries.

One reason for this is the lack of an overarching system for debt recovery; this forces different classes of creditors to pursue their claims through a range of processes.

The failure to achieve swift restructuring has led to extensive erosion of the value of assets in distressed companies which, in some cases, is exacerbated by the controlling shareholders transferring assets out of the business.

The new code promises provisions that are on a par with international best practices. One, being called the waterfall provision, entails that once the assets of a firm are sold, the proceeds will be distributed among the creditors’ in the following order—secured creditors’ dues, wages of employees, dues of unsecured creditors and government dues.

This provision protects the rights of workers in case of insolvency, paying their dues for up to 24 months and is a welcome change as under employees often end up bearing the brunt of long-drawn bankruptcy processes.

Moreover, the code is the first in the history of Indian bankruptcy legislation to attempt to address the issue of cross-border insolvency. This will encourage cross-border financing and unsecured lending.

However, for the code to overhaul one of the slowest insolvency regimes in the world, several operational issues need to be ironed out. For instance, the code has repealed two statutes and amended 11 others, such as the Companies Act, SICA and Sarfaesi.

Thus, it becomes imperative that these legislations are seamlessly synchronised to avoid discrepancies and overlaps in existing laws. Moreover, with the pile of pending cases before the Debt Recovery Tribunals, it will be a long while before the new code would be able to clear the back-log.

The sheer enormity of insolvency cases in the country and the lack of proper infrastructure to support it would be a key challenge.

Successful implementation of the code will also require a huge force of trained and skilled insolvency professionals who can make an accurate assessment of the health and status of the debtor before passing necessary orders.

Training this large pool of people is in itself a daunting task and will require substantial amount of time, resource and expertise

Having said that, the code is definitely a landmark legislation. It promises to provide the country with the muscle and framework for time-bound resolution of delinquent debts.

India now has a bankruptcy and insolvency framework that will go a long way whetting up risk appetites and will propel India further up in the global ease of doing business rankings.

With the nuts and bolts already in place to set the machinery whirring, what is left is to keenly observe the implementation and working of the law.

Aided by a competent risk mitigation mechanism, including rigorous due diligence, stringent fraud investigation and meticulous assessment of books of accounts, this has the potential to transform the health of India’s ailing financial system.

With inputs from Dipti Chawla and Jyoti Bhowmick

The author is leader (risk & advisory), BMR Advisors. Views are personal