Corridors of power: Reforms on the rebound

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Updated: December 25, 2015 12:58:19 AM

The NDA government failed to foresee the danger of reform legislations like the Land Bill and GST Bill getting stuck in Parliament. But with signs of change in government approach towards the end of the Winter session, Budget session prospects have improved.

While taking part in the discussion on the Insolvency and Bankruptcy Code, 2015, in the Lok Sabha on Tuesday, Trinamool Congress MP Saugata Roy described the NDA government’s efforts to bring in economic reforms in an interesting manner. He narrated the story of a jilted lover who goes on to marry another girl if the girl he loved earlier rejects his offer, calling it an ‘action on the rebound’.

The Trinamool MP said this was exactly the way finance minister Arun Jaitley was trying to move forward on the economic reform front. The manner in which he introduced the Insolvency and Bankruptcy Code in the Lok Sabha—the moment he got to know that it was not possible to get the Goods and Services Tax (GST) Bill passed in the winter session—reflected just that.


A seasoned politician and parliamentarian, Roy suggested to the government that it should take the reality of not having a majority in the present bicameral system into consideration before bringing revolutionary Bills, and should find a way to reach out to and convince opposition parties to support those Bills. And even though Roy’s opposition to the insolvency and bankruptcy legislation stood on a weak footing, he made a perfectly valid point on how the NDA government can improve its floor management in Parliament.

It is against this backdrop that FM Jaitley did well by at least trying to recover some of the lost ground by not introducing the Insolvency and Bankruptcy Code as a Money Bill, which would have meant that even without the Rajya Sabha’s consent, it would have got passed in Parliament since the NDA has a majority in the Lok Sabha. By also agreeing to refer it to a joint committee of both houses, he has increased the chances of its passage in the Budget session in the normal course.

It is difficult to understand why the government chose to bring the insolvency and bankruptcy Bill only after it saw that the GST Bill couldn’t be passed in the winter session and didn’t push it at the beginning of the session itself. Even in order of importance, it is no less significant than the contentious GST Bill, but the government overstretched the significance of the GST Bill and turned it into a battleground for a slugfest in Parliament with the Congress party.

So, why is the Insolvency and Bankruptcy Code so critical for improving the ease of doing business scenario in the country? The Bill seeks “to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interest of all the stakeholders, including alteration in the order of priority of payment of government dues and to establish an Insolvency and Bankruptcy Fund and for matters connected therewith or incidental thereto,” FM Jaitley explained it quite well in the Lok Sabha while commending the Bill.

At present, if a business runs into such losses that it becomes completely insolvent or bankrupt and cannot function, the assets lying with it get wasted in a majority of cases. The end-result is that workers, secured creditors and bankers don’t get any money, along with the revenue department. So, it is essential to bring in a system in the country which makes exit from a failed business easy and productive for all stakeholders to the maximum possible extent.

The exit mechanism available for private individuals doing business today is the Provincial Insolvency Act, under which insolvency courts function at the district level. But the system has failed to deliver anything despite being in existence for decades. In case of companies, there are different methodologies available. One methodology is the High Court official liquidator route prescribed under the Companies Act in case of commercial insolvency, which takes years, and in terms of priority, it is the tax department which gets the first amount, then some money goes to secured creditors and the workmen.

Another mechanism for companies is the Board for Industrial and Financial Reconstruction (BIFR) route which came into existence in 1985, but very few companies have got revived under this window, that means the application of the whole Companies Act process after wasting years in the name of revival.

Then there is the Debt Recovery Tribunal route, through which banks and financial institutions can recover their money, and also the SARFAESI Act, 2001, allowing banks and financial institutions to take possession of the assets of the debtor to recover their own money by selling the assets.

The ground reality is that all these mechanisms have failed to yield much. The proposed Insolvency and Bankruptcy Code seeks to correct this situation by consolidating all insolvency and bankruptcy related laws into one with the help of just two kinds of insolvencies—one for the companies and limited liability institutions, and the other for private individuals and unlimited liability institutions. Insolvency professionals working under a regulator will handle the whole process, in which, after a company or an individual becomes bankrupt or insolvent, all his assets will be taken into custody.

What makes it more attractive politically is the fact that, according to the provisions of the new statute, the workmen will get the first priority in the distribution of money along with secured creditors, and then unsecured creditors and the tax department after that.

The joint parliamentary committee route is now expected to allow the Bill to be passed quickly in both the houses, as the upper house will not be able to send it to a select committee and, in any case, the Insolvency and Bankruptcy Code is unlikely to become as contentious as the land acquisition amendments Bill.

The move undoubtedly eased the situation on the parliamentary logjam front to an extent towards the end of the winter session, which also saw passing of a number of Bills including the SC and ST (Prevention of Atrocities) Amendment Bill and the Juvenile Justice (Care and Protection of Children) Bill in the Rajya Sabha after the chairman of the house called an all-party meeting to deal with the derailment of the legislative business due to the disruptions, especially over issues related to the Governor of Arunachal Pradesh and the National Herald case.

Though it would be difficult for the government to pass the GST Bill even in the Budget session, considering the lack of trust and cooperation between the NDA and the Congress party—which holds the key in the Rajya Sabha for the passage of any Bill—the developments in the last few days of the winter session do provide an indication of better results in terms of getting the legislative business done in the Budget session.

The Congress is facing the danger of getting isolated in Parliament if it continues with its rigid stance against whatever the government tries to do, and the NDA government will benefit from it if it also climbs down from its high-handed approach. Taking non-NDA parties into confidence as far as possible is the only way out for Prime Minister Narendra Modi and his floor managers in Parliament to improve the government’s performance in getting economic reform legislations passed.

Going ahead, they must always remind themselves of their numbers in the Rajya Sabha (see chart) before taking up any contentious economic reform legislation, including labour law changes, and then formulate a strategy to avoid fiascos like the ones on the land bill and now on the GST.

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