Chances of bankruptcy law passage brighten
New Delhi: Prospects of the early passage of a bankruptcy law, which makes it easier for sick companies to be either wound up or revived, improved after a parliamentary committee reached political consensus on it.
“There is unanimity about the bill in the joint parliamentary committee. I don’t see any problem in the passage of the bill in the Parliament unless some extraneous factor comes into play at the last minute,” a member of the committee said, speaking on condition of anonymity.
The revised bill, which was supposed to be submitted by Friday, just ahead of the resumption of the budget session of Parliament on Monday, may be delayed by a week to allow members more time to vet the bill.
Several members, added the committee member, have asked for more time to review the changes.
“The next meeting of the joint parliamentary committee has been called on 26 April, after which the bill will be tabled in the Parliament.”
The Insolvency and Bankruptcy Code, 2015 was introduced by finance minister Arun Jaitley in the Lok Sabha on 21 December 2015.
It seeks to create a unified framework for resolving insolvency and bankruptcy matters and is a key element in the government’s strategy to rid the financial sector of its bad debt problem.
Gopal Srinivasan, chairman and managing director, TVS Capital Funds, said the bankruptcy bill is the most important legislation pending before Parliament.
“This bill is very helpful for mid-market and small and medium enterprises,” he added.
The joint parliamentary committee is proposing provisions to deal with cross-border insolvency and prioritizing settlement of dues for workers from funds raised through liquidation of assets.
“We have ensured that if a dispute arises with the foreign investor in the defaulting company while liquidating the assets of the company, then a settlement could be reached under the bankruptcy code,” the committee member said.
Cross-border insolvency is one where the defaulting company has assets in more than one country or where some of the creditors of the company are not from the country where the insolvency proceeding is taking place.
“Cross-border insolvency cases can only take place when there is an insolvency law in place in the country. Including it as part of the basic bankruptcy bill increases the bandwidth of this law,” said Nikhil Shah, managing director at Alvarez & Marsal in India.
T.K. Viswanathan, a former law secretary and author of India’s bankruptcy code said the current bill did not talk about cross-border insolvency because there is no existing domestic institution dealing with insolvency and foreign laws override domestic legal system.
“First, we need to develop the domestic institution and then cross-border insolvency can be added to the law through an amendment or through a separate bill,” he added.
The committee is also proposing to prioritize payment of dues to workers of the defaulting company.
“Workers’ interest had been relegated to the background under the current bill. A number of Parliament members and trade unions had raised objections that interest of labourers have not been duly taken care of. The dues pending to workers of a company declaring insolvency have now been protected under the revised bill,” the committee member added.
Viswanathan said the bill deals with this by ensuring payment within a year of the liquidation of the company. “Unlike now, when it takes years to liquidate an insolvent company and at the end of it workers get nothing, under the proposed bill, liquidation will be fast-tracked and hence the workers will not remain unemployed without dues for long.”
According to the provisions of the bill introduced in Parliament, corporate insolvency applications will have to be considered within 180 days, with an option of a 90-day extension.
Currently it takes, on average, more than four years to resolve insolvency issues in India, according to the World Bank’s Ease of Doing Business report. The new code seeks to reduce this to less than a year.
It also proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator.
The new bankruptcy code will extend to individuals, companies, limited liability partnerships and partnership firms, and proposes a time-bound framework.
It will also amend other laws, including the Companies Act, to become the overarching legislation to deal with corporate insolvency.
At an interaction with institutional investors hosted by Citibank in New York on Tuesday, Jaitley said he expects to table the bankruptcy code bill in the second part of the budget session and does not anticipate much opposition to it.
The government wants to enact the bill at the earliest so that it gets reflected in the World Bank’s ease of doing business rankings for next yea, the cut-off for which is 31 May.
India is ranked 136 among 189 countries in the index in the category of resolving insolvency and its overall raking is 130.
Pooja Sarkar in Mumbai contributed to this story.