BackGovernment panel report on insolvency in small, medium units likely by budget session
Panel set up by finance ministry to help frame a bankruptcy code to submit suggestions on insolvency in small and medium enterprises
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New Delhi: A panel set up by the Union finance ministry to help frame a bankruptcy code will submit its suggestions on insolvency in small and medium enterprises (SMEs) by the budget session of Parliament, followed by its report covering the larger corporate sector later next year.
The government is hoping that a bankruptcy framework, along with the various steps taken in the last few months, will improve the country’s ranking in the World Bank’s Ease of Doing Business report. India is currently at the 142nd rank out of 189 countries.
“The idea is to have a balance between a debtor-friendly and creditor-friendly code. India should have an institutional framework for firms that are heading for failure—either to help restructure them or help in their winding up," said T.K. Viswanathan, who heads the committee tasked with framing the code.
“We will follow not just the legal framework followed in the US but also that of Singapore and Australia, and may suggest amending certain Indian laws," he said.
“We will first look to submit a report on how to deal with bankruptcy among SMEs by the next budget, and then look at a larger picture of dealing with insolvency. It should help improve the doing business ranking of India," he added.
The Parliament’s budget session is normally held in the month of February.
The committee’s terms of reference include early detection and resolution of financial distress in companies, protection of stakeholder interests, studying the rescue mechanism for companies and suggesting ways of improving it, examining the role of institutions engaged in the process of rescue and liquidation and the liquidation procedure for smaller companies.
In an interview on date 6 November, Srivatsan Rajan, managing director at consulting firm Bain and Co.’s India unit, had pointed to the urgent need for a bankruptcy code in India. “There is a lot of capital that is locked up. We need to find a way to unlock distressed assets... User entry, operations and exit—for a healthy economy, all three have to work in tandem," he had said.
Though the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act ensured that banks get a preference over other stakeholders in settling dues, there has been no effective mechanism for a company to wind up its business and compensate other stakeholders.
The Board for Industrial and Financial Reconstruction was envisaged as a revival mechanism for companies using specialized tribunals, but it has not been very effective. The National Company Law Tribunal proposed under the new Companies Act has also not taken off after the Madras Bar Association filed a writ petition against its provisions in the Supreme Court.
A bankruptcy code is expected to facilitate earlier exit for investors. The committee will hold discussions across the country before finalising the framework.
Chandrakant Salunkhe, president of the SME Chamber of India, said the code should be devised in such a way that it benefits companies genuinely facing stress due to the economic environment.
“Most of the small entrepreneurs put in their own capital into the business. But sometimes, due to some issues like labour or non-payment of dues by other entities, the SME enterprise may come under stress. A bankruptcy code will help in survival of companies and probably help them later to restart their business," he said.
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