With the Company Law Board approving Tech Mahindra’s bid for Satyam on Thursday, India is breathing a sigh of relief: Its biggest corporate scandal has been laid to rest. But before we forget the drama witnessed only a few months ago, we should glean the right lessons from the resolution of the Satyam debacle.
In this case, the government swiftly intervened to appoint new directors. But this was an extraordinary intervention. If a Satyam occurs again tomorrow, can we expect the government to react as sensibly? Such interventions should not be ad hoc responses, but rather part of a predictable process. This case shows the need to have better restructuring and bankruptcy procedures.
Illustration: Jayachandran / Mint
While the two issues are different, there can be situations where better bankruptcy laws and restructuring may be needed at the same time. A combination of the two can go a long way in ensuring that a company with good prospects does not die due to legal complications and lack of financing. The existing laws—the 1985 Sick Industrial Companies Act (Sica) and parts of the 1956 Companies Act—are not designed for the kind of reorganization Satyam, or any modern company, may demand. Sica, for instance, only aids a firm once most of its net worth has eroded, which may be too late.
What India needs, then, is an entire new bankruptcy code on the lines of Chapter 11 in the US bankruptcy laws, one that comprehensively deals with reorganizing troubled companies. A 2001 advisory committee recommended precisely this to the Reserve Bank of India. But legislation on this front still hasn’t seen the light of day.
Given the hindrances that any such legislation faces in Parliament, perhaps that may be hoping for too much: Better enforcement of existing laws and procedures can go a long way. But even that seems a pipe dream. A separate court to deal with corporate bankruptcy, called the National Company Law Tribunal, was formed under a 2002 law. But thanks to bureaucratic delays, it hasn’t started functioning.
This means an already strained court system has to entertain bankruptcy references. Naturally, petitions remain stuck in poorly staffed courts.
It’s not as if these problems have just come to light. Besides government-appointed advisory committees, academics and lawyers have given a host of suggestions in the last decade. Let’s hope Satyam proves to be the impetus to start implementing them.
Will the Satyam episode lead to better bankruptcy laws and restructuring procedures? Tell us at email@example.com