India Set to Adopt New Bankruptcy Code to Clear Up Bad Debts

India is on the verge of approving a new bankruptcy code that will aim to ease the process of winding up failed businesses in the country. This measure would be a major step forward in assisting India to transition into a full-fledged market economy.

Bankers in the country have expressed support for the bankruptcy code as they feel that it would speed up the process. Data from the World Bank states that it requires close to 4 years to shutdown a failing company in India which is twice the time it takes in China. Recovery of debt is usually only 25.7 cents to a dollar making it the worst among the emerging markets.

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Under the provisions of the new bill, creditors would be able to initiate an insolvency resolution process in case of a default, which must be ideally completed within 180 days.

This period can be extended by 90 days if 75 percent of the creditors come to an agreement on a revival plan. If not, the company would be liquidated. The bill stipulates five years in jail for debtors who fail to disclose assets or defraud creditors.

A parliamentary panel recently approved the bankruptcy bill after reviewing it and has recommended that creditors be allowed to pursue foreign assets of defaulters for recovery purposes. The recent case of liquor baron Vijay Mallya highlighted the issue, with public banks facing a default of Rs. 9,000 crore as a result of the failure of Kingfisher Airlines.

Based on the current law, the authorities have found it extremely difficult to access his foreign assets.

Although the Modi government has been facing fierce opposition to key legislation in the Parliament, this bill is seen to have wide-ranging support across all parties. However whether it will be passed in the current Parliament session depends on how smoothly the Parliament is allowed to function.

Government officials have said that clearing of the public banks’ bad loans amounting to almost $100 billion is a key priority of the Modi administration. According to data from Reserve Bank of India, the backlog of unresolved cases in debt recovery tribunals has gone up 12 times over a three year period to reach $57 billion in March 2015.

RBI Governor Raghuram Rajan has said that the new legislation will support the developmentof the country’s corporate bond market. Rating agencies have opined that the new law could significantly impact the banking sector in the medium term.

Charlie Harrison

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