Why test for bankruptcy law is a larger test for India

Written by Shaji Vikraman
Updated: June 12, 2017 12:38 am

bankruptcy, bankruptcy law, bankruptcy test, bankruptcy law test, new bankruptcy law, NCLT, indian express news, explained, india news There is heightened attention on the new process because existing laws and mechanisms such as corporate debt restructuring, which were meant to address the issue of bad debt, haven’t quite worked.

India’s new bankruptcy law — which came into force at the end of last year, about 18 months after it was formally proposed in early 2015 —will face its first test later this month when the resolution plan for Kolkata-based Nicco Industries is adjudicated. The adjudication process will signal whether the sick company can be restructured or shut down swiftly — within 180 days of the case being registered.

Over 1,000 applications for resolution have been filed, more than 100 of which have been admitted by the arbiter, the National Company Law Tribunal or NCLT, which is expected to decide on the fate of many non-financial firms within 180 days.

Read | Explaining the Bankruptcy law — and the need to have one

Closely watching the working of the Bankruptcy Code — the rules for which have been framed by the Insolvency and Bankruptcy Board of India or IBBI, which regulates the professionals handling the process — will be banks sitting on a mountain of bad debt of over Rs 6 lakh crore, India’s central bank, which is now mandated to direct local lenders to quickly resolve hundreds of cases of firms that have defaulted on their loans and gone belly up, as well as investors — known as vulture funds in the West — who swoop on such assets, hoping to buy them at rock bottom rates, and make money down the line, following a turnaround.

There is heightened attention on the new process because existing laws and mechanisms such as corporate debt restructuring, which were meant to address the issue of bad debt, haven’t quite worked.

By the end of this year — by when the mandatory 180-day deadline for resolution is reached in a few other cases as well — the initial experience of an important reform will be manifest. The stakes are high because the way in which the bankruptcy process evolves, will be crucial for boosting the country’s ranking in the Ease of Doing Business sweepstakes. A little after his government took over, Prime Minister Modi had said that the aim was to take India from a ranking of 142 in 2014 to the top 50 in three years.

There is much more at stake. Speedy resolution of the debt woes of lenders will mean freeing up of capital for fresh lending to India’s businessmen, including small and medium entrepreneurs and industry. It will lead to a more efficient allocation of resources, as well as the development of a market for secondary assets, which the country badly needs — rather than the destruction of value of assets, which inevitably results from long delays in settling cases. This will count significantly for banks and lenders in India who, under the looming shadow of investigative agencies, currently baulk at taking decisions such as those on a haircut or accepting a lower value of assets.
It is a new experience for India to have a group of lenders or equity or debt holders to approach the NCLT to establish default. If the Tribunal is satisfied and admits the case, a set of people known as “insolvency professionals” — chartered accountants, cost accountants or company secretaries — who are regulated by the IBBI, step in. They prepare a resolution plan, which involves restructuring where possible, or liquidation where it is concluded that nothing will work and it is better for the firm to die. The plan must be approved by 75 % of the voting share of creditors, and then sanctioned by the adjudicating authority, the NCLT.

For the new band of insolvency professionals too, it will be a learning process to take de facto interim charge of the firms. They too will be tested. By the end of the year, the number of registered insolvency professionals could top 1000.

Perhaps it would be pragmatic to expect equity and debt holders to try out this route for only some of the worst cases in the initial phase. There’s a good reason. The market for buyouts of distressed assets is yet to develop — which means that those whose money is at stake may have to settle for a lower value. Over the next few years, as professional insolvency services improve and the ecosystem for an efficient resolution develops, the impact of this reform will be felt, according to M S Sahoo, who heads the IBBI.

India’s Bankruptcy Code is modelled on the lines of what is in vogue in the US, which has what are known as Chapter 7, 11 and 15 bankruptcies, and the United Kingdom, where resolution has to be within 12 months.

The way the resolution process works in the initial phase will influence decisions to take recourse to it for addressing bigger cases of default. For that, India will need to equip the NCLT better — the Tribunal has started off with 11 benches, which could be too few given the huge number of cases that could potentially come up. The bigger challenge will be at the time when cases of individuals are taken up for resolution — this is expected a year or so down the line. It would mean putting in place Debt Recovery Tribunals across the country, where individuals can seek to recover their money. And also when the resolution process begins for financial firms — like banks — which need to be either revived or shut down.

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