Resurgent India

A New Bankruptcy Code Is Reshaping Indian Business

December 23, 2018 Admin

When the sudden departure of the famous drinks tycoon Vijay Mallya, the self-proclaimed “king of good times” followed the failure of his foray into aviation, with Kingfisher Airlines defaulting on debt of $1.3bn in 2012, the whole country gripped to the exposure of the unhealthy relationship that had developed between India’s state-owned and private banks and major corporations.

 

The Introduction of the Code in May 2016 was a 'WAKE-UP CALL' for all the defaulters across the nation. Before the code was enacted, lenders were at the mercy of big borrowers. Under the new law, any creditor owing as little as Rs100,000 ($1,400) can file an insolvency petition against a defaulting company. If accepted by the court, the management has to be removed immediately, and the company shall be liquidated within nine months if no buyer can be found.

Why is the code so important?

In the capital-starved environment of our country, the code has ensured that the capital isn’t frittered away on weak and unviable businesses and it merits further review in order to balance the twin objectives of speedy resolution and maximizing recovery for the lenders.

 

Insolvency Law Committee had earlier made suggestions to the Ministry of Corporate Affairs including addressing the situation of home buyers, expanding the pool of potential bidders, making recoveries easier for lenders, and expediting the decision-making process by creditors.

 

Progress report of last two years

IBC has represented a big change in the power equation between creditors and debtors. It has worked out positively in the favor of creditors. For instance, SBI will write back the loss of 15 million rupees with the winning of the bid by Tata Steel to acquire debt-laden Bhushan Steel (BSL) in the insolvency auction with the payment of Rs.32,500 crores to lenders.

 

“In the past, No big businessman had been put behind bars, and they knew they could ward off their lenders through very lengthy legal processes,” said Prabodh Agarwal, chief financial officer at IIFL Holdings. This will help in faster turnaround of MSME sector during insolvency, protect interests of home buyers and streamline various provisions to improve recovery from NPAs .

 

Going forward, amendments to the bankruptcy code should primarily be driven by the goal of maximising the sale price of stressed assets. This requires a robust market for stressed assets that is free from all kinds of entry barriers.

 

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