The exit option
There is little doubt that smoother insolvency settlements will help more efficient capital allocation in the Indian economy
The sale of Bhushan Steel to Tata Steel is a good example of how the new Insolvency and Bankruptcy Code is making an early impact.
Look at some comparative numbers. The lenders to Bhushan Steel are likely to get 73 paise on every rupee of exposure they have to the firm, while the World Bank’s Ease of Doing Business data tells us that the average Indian insolvency case used to get creditors only 26 paise on every rupee. Additionally, the case is being settled in a few months, compared to the average 4.3 years taken till now in such situations.
These are early days. Not all settlements may go through smoothly—and even the Bhushan Steel one is not yet a done deal. However, there is little doubt that smoother insolvency settlements will help more efficient capital allocation in the Indian economy. Capitalism without free exit is not what the doctor ordered.
Finally, credit is also due to the Reserve Bank of India for forcing lenders to take large defaulters to the bankruptcy court. A lot of cosy deals must have been disrupted in the process.