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Bankruptcy Code: Decoded
Wed, 11 May Pre-Open

A few days ago, Lok Sabha passed the much awaited ‘The Insolvency and Bankruptcy Code, 2015’. If experts are to be believed, this bankruptcy code will lead to speedy winding up of insolvent companies. Not only this, the proposed bill will also help the banks to curb their massive non-performing asset (NPA) problems.

The crisis of Kingfisher Airlines is one example. The company went bankrupt in 2012. Its 2016. And banks are still struggling to recover their dues. A slow process indeed!

A part of this delay is attributable to multiplicity of laws dealing with insolvency of companies. These laws includes the likes of Sick Industrial Companies Act, the Recovery of Debt Due to Banks and Financial Institutions Act, and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). However, the proposed bill seeks to consolidate all these existing laws.

Consolidation of all these laws will also lead to lesser time in resolving the issue. Moreover, the bill specifies a timeframe of 180 days to solve the matter, once the process initiates. The data provided bythe World Bank states that it take more than four years to resolve an insolvency matter in India. In developed nations, it takes a year or less to resolve such matters. The proposed bill will considerably reduce this time gap and will also help India move up the Ease of Doing Business rankings.

Last but not the least it will provide huge relief to banks. Marred by NPAs, Indian banks are in a sorry state. According to central bank data, stressed assets (which include gross bad loans, advances whose term has been restructured and written-off accounts) rose to 14.5% of the banking sector loans as of December 2015. The bill will enhance the banks’ ability to recover the loans in a timely manner. This will free up the locked capital and will lower their NPA levels.

However, there are certain flaws that come with the bill as well...

Once the corporate entity is termed as bankrupt by the assessing authority, the management or promoters lose control over the business. Insolvency professionals would then manage the business. The present bill states that it could be either the entity which is heading towards bankruptcy or the creditors which can file for bankruptcy. Considering that the management is foreseeing giving up control, there would rarely be a time when it would report the matter on its own. It also become difficult for creditors to have much knowledge regarding the solvency of the company. By the time it comes out in open it may be too late for the creditor to recover any money from the entity.

Further, the bill provides a hard deadline of 180/270 days for completion of corporate insolvency process. If the process is not able to be completed in the time frame, the bankrupt entity will have to liquidate its assets. This hard deadline could possibly impact the turnaround efforts, and in the process affect the livelihood of workforce.

On an overall basis, the bill appears to bring in positive development to the banking industry as it is a much needed solution to a major problem affecting the sector. This could possibly make India a more attractive destination as it would help the country move up in the Ease of Doing Business rankings.

All eyes on whether this bill gets cleared in the Rajya Sabha.

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