India has been going through a difficult time with rising NPA (Non-Performing Asset) issues that have surfaced of late. NPAs at the end of December, 2015 were 6% of the total loans at Indian banks. This has caused undue strain on the Indian credit system. Further, multiple overlapping laws and an ineffective institutional framework have made timely recovery or restructuring of such defaulted assets very difficult. The recovery rate of troubled loans in India currently stands at 25.7 cents per dollar and the time taken for winding up an ailing company takes close to 4 years. This is amongst the worst in the world.
The Insolvency and Bankruptcy Code 2016
The Insolvency and Bankruptcy Code 2016 was passed by the Rajya Sabha recently. The bill will consolidate the current framework of multiple laws relating to insolvency and create a single legal and institutional structure. This would provide greater clarity and would reduce the delays associated with addressing insolvency issues considerably. Once the President signs off on the bill, it will become a law. For more detailed information on this, please visit the Press Information Bureau website.
Who will it benefit and how?
Creditors’ sentiments have not been positive when it comes to funding Indian firms. The fear of a default by the firms, coupled with an ineffective legal and institutional framework with regard to addressing insolvency issues have been discouraging factors. The partly recovery of funds and numerous delays have hurt creditors and shattered their confidence on the legal system in India. The new bill aims to instill belief in the insolvency process in India by introducing changes in the current framework that would reduce delay and improve the recovery rate.
The bill mandates the completion of the entire bankruptcy process to within 180 days and provides a 90 day extension if the case demands so. This will remove any inhibitions on the part of the creditors with regard to delays in the recovery process and provide businesses with access to more funds thus promoting entrepreneurship and increasing availability of credit. Insolvency professionals who have been introduced in this bill will help sick companies and banks with a smooth and fair takeover of the insolvent firm. They will also manage the entire liquidation process and would be regulated by a new body – the Insolvency and Bankruptcy Board of India. Thus, interests of all stakeholders would be balanced. This addition would further aid in a quicker and fair process and also in better management of such sick firms. India’s ranking in ease of doing business would also improve as a result of this implementation and this would further help the banking sector (as said by Moody’s).
However, anything new that is to be done comes with its own challenges. Many analysts have pointed out that the bill looks good on paper, but implementation remains a big challenge. Creating a large pool of insolvency professionals who would be tasked with the responsibility of steering the entire bankruptcy process appears to be the biggest challenge. In addition, the drafting of new procedural rules for these insolvency professionals would take some time. India’s legal system is quite cumbersome and therefore, overall, the bill would not be easy to implement.
The bill has been met with a lot of positivity by the corporate world and more so by creditors as it provides them with confidence that in case of any default, there would be a fair and quick process to settle the same. The bill would also help in laying down the foundations of the bond market, as India’s corporate bond market is not that active when compared to other such markets in the world. With the passage of the bill, India’s overall ranking in the World Bank’s resolving insolvency ranking is set to improve. This bill is another step from the current government towards improving business conditions in India and improving the image of the Indian legal system when it comes to settlement of defaults. However, as is the case with any new implementation, the bill would start to show results only after a few years (may be 4 to 5 years).
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