Bankruptcy Code

Why it is important for Indian business…

The Bankruptcy Bill was passed in the Lok Sabha and is pending to be passed in the Rajya Sabha. The Bankruptcy Bill has been demanded by industry and banks for long as it is likely to make the entire process of liquidation of business easier and less painful. Why exactly is the Bankruptcy Bill so critical in the context of Indian businesses?

Entrepreneurs need an exit…

The current government has been talking about encouraging small businesses and entrepreneurs. One of the most important pre-requisites is the passage of a Bankruptcy Bill. In India, entrepreneurs will be more willing to take risk in setting up new businesses if they are confident that there is an honorable exit route for them. Businesses the world over go through a process of creative destruction. There are ideas that succeed and there are ideas that fail. The Bankruptcy Bill will ensure that when business ideas do not work or the running of a business becomes infeasible, there should be an exit route for the entrepreneur without imposing too much of a financial burden. India has been ranked low on the “Ease of doing business” index and this Bankruptcy Bill can go a long way in moving India’s rank up.

It will be a boon for banks…

The one sector that will really welcome the Bankruptcy Bill is the banking sector, especially the PSU banking space. Today the SARFAESI Act is grossly inadequate for banks to take possession of assets of a defaulter and recover their monies. Currently, the PSU banks are sitting on a pile of NPAs to the tune of $60 billion. The entire process of recovering their dues could take a really long time. The Bankruptcy Bill stipulates that the entire process of liquidation and insolvency is completed in 180 days, extendable to a maximum of 270 days. This will help the banks to ensure that the brand value is maintained, the assets are ring-fenced and the bank is able to realize value on the assets against loans.

Concept of individual insolvency…

The Bankruptcy Bill also covers the issue of individual insolvency, which can give beleaguered individuals an exit route from the debt pile. Also the Bill has a mechanism to distinguish between a genuine business loss and willful default. This could be the key. While this system is quite popular abroad, in India it carries the stigma. The new Bill will make it more palatable.

Foreign investors have been insisting on a viable Bankruptcy Code for long. While the idea of completing the entire liquidation process in 180 days is commendable, implementation will be critical. With a legal system under pressure, it needs to be seen how this is actually implemented in reality! ©

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