The government has set up a committee to frame a bankruptcy law to enable entrepreneurs to close down unviable businesses. The move is likely to primarily help small and medium enterprises (SMEs).
A bankruptcy law will facilitate faster wind-up of insolvent companies and provide an easy exit route for investors.
Other countries have structured bankruptcy laws. The US Bankruptcy Code, Chapter 11, for instance, takes companies through a court-monitored process of liquidation or financial restructuring.
Finance minister Arun Jaitley, while presenting the Budget 2014-15, had announced that a framework would be developed for SMEs to enable easy exit.
At present, there is no bankruptcy law in India.
The committee, to be headed by TK Vishwanathan, former law secretary, will examine issues relating to bankruptcy with a focus on early detection and resolution of financial distress, protection of stakeholders' interest, liquidation procedure among other things. It is also expected to recommend ways of framing a rescue mechanism.
The committee will submit its report by February next year.
Micro, small and medium enterprises (MSMEs) contribute about 8% to India's GDP. The government has earmarked Rs 24,000 crore towards the sector under the 12th Plan against Rs 11,000 crore in the 11th Plan. All public sector banks are expected to allocate at least 55% of credit to MSMEs, register a 10% annual growth in the number of micro enterprises and raise their credit growth to the sector by 20%.