4 min read.Updated: 06 May 2016, 12:57 AM ISTRemya Nair
The bankruptcy code will enable faster exits for firms or help them turn around their businesses, thereby improving the ease of doing business
New Delhi: India has moved a step closer to adopting a new bankruptcy law after the Lok Sabha passed the legislation on Thursday.
If approved by Rajya Sabha, the law will ensure time-bound settlement of insolvency, enable faster turnaround of businesses and create a data base of serial defaulters—all critical in resolving India’s bad debt problem which has crippled bank lending.
The creation of the law will also improve India’s position in the World Bank’s Doing Business ranking.
On Thursday, the lower house passed The Insolvency and Bankruptcy Code, 2016, with all the amendments proposed by the joint parliamentary committee being accepted by the government.
Even though the National Democratic Alliance (NDA) is in a minority in the upper house, where the opposition has held up key legislations, the endorsement of the parliamentary committee, which included members from all political parties, may smoothen the law’s passage in the Rajya Sabha.
The new code will replace the existing bankruptcy laws and cover individuals, companies, limited liability partnerships and partnership firms.
It will amend laws, including The Companies Act, to become the overarching legislation to deal with corporate insolvency. And, it will also help creditors recover debt faster.
Enactment of this legislation before 31 May this year will help India improve its position in the World Bank’s ease of doing business ranking, where it is currently ranked 130.
On the parameter of resolving insolvency, India is ranked 136 among 189 countries. At present, it takes more than four years to resolve bankruptcy in India, according to the World Bank. The code seeks to reduce this time frame to less than a year.
Calling it a transformational legislation, minister of state for finance Jayant Sinha said the law restores the balance of power between promoters and creditors. “There were 12 laws, some of which were more than 100 years old, to tackle insolvency, and now there will be one law. We will be able to quickly move up the World Bank rankings," he said in the Lok Sabha.
The bill, after being introduced in December, was referred to a joint committee of both the houses of Parliament. The panel, which submitted its report last week, had proposed a number of changes.
These include provisions to address cross-border insolvency through bilateral agreements with other countries and shorter time frames for every step in the insolvency process—right from filing a bankruptcy application to the time available for filing claims and appeals in the debt recovery tribunals (DRTs), National Company Law Tribunals (NCLTs) and courts.
Bankruptcy applications will now have to be filed within three months rather than the earlier six months.
To protect workers’ interests, the committee proposed that the money due to workers and employees from the provident fund, the pension fund and gratuity fund shouldn’t be included in the estate of the bankrupt company or individual. Further, workers’ salaries for up to 24 months will get first priority in case of liquidation of assets of a company, ahead of secured creditors.
There are also provisions that disqualify anyone declared bankrupt from holding public office, thereby ensuring that politicians and government officials cannot hold any public office if declared bankrupt.
Varun Gupta, partner (deal advisory) at KPMG in India, said in a note that the legislation will help in ease of doing business in India and speed up the resolution process for stressed assets in the country.
“There is a significant amount of work still to be done in creating the insolvency practitioners ecosystem, the tribunals and the operating guidelines over the next few months, but boards of companies will have to start re-examining how they deal with all classes of creditors once the code comes into place," he said.
The bill proposes the creation of a new class of insolvency professionals that will specialize in helping sick companies.
It also provides for creation of information utilities that will collate all information about debtors to prevent serial defaulters from misusing the system.
The bill proposes to set up the Insolvency and Bankruptcy Board of India to act as a regulator for these utilities and professionals.
Addressing questions about protection of information gathered by the information utilities, Sinha said that the regulated information utilities will remove the current opaque structures and bring in transparency so that information about debtors is available on an almost real-time basis.
“The information utilities will be regulated by the bankruptcy board which will have eminent people," Sinha said, adding that the government is committed to punishing wilful defaulters.
Sinha added that asset reconstruction companies will be an important part of the new ecosystem that has been created.
“They will be able to procure assets from DRTs and the bankruptcy board," he said.
Sushmita Dev, Congress member of parliament from Assam, pointed out that proper implementation of the code will be crucial to its success. “Implementation will be key. Will my government be in a position to put life into this vision in terms of human resource and infrastructure," she asked.
Dev pointed out that the government will have to move faster to strengthen DRTs and appellate tribunals for effective implementation of the law.
Nikhil Shah, managing director at turnaround specialist Alvarez & Marsal (India), said it will be a game changer for how creditors and debtors will deal with insolvency, going forward.
“We hope that the implementation of the bill will be as thoughtful and rigorous as the formation of the bill has been. This bill should help in significantly improving recoveries for lenders of prospective stressed loans. It will also lead to more investment interest in India from global credit investors as there will be more certainty to the process in the event of stress," said Shah.
Vishwanath Nair contributed to this story.
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