The Lok Sabha on Thursday passed a bankruptcy code, aimed to enable failed businesses to wind up faster, aid quicker dispute resolution, and hasten debt recovery by banks that have been snowed under bad loans worth over Rs 4 lakh crore.
The Insolvency and Bankruptcy Code 2016 was passed by a voice vote in the Lok Sabha and is expected to be passed by the Rajya Sabha soon.
Once voted into law, the code will give a legal framework to deal with sick companies, which become insolvent due to genuine reasons. The move, first announced by finance minister Arun Jaitley in Budget 2014, is aimed at modernising the country’s century-old bankruptcy rules.
The code will likely bolster banks’ efforts to recover bad loans from wilful defaulters—borrowers who default despite having the capacity to repay.
A consortium of 17 banks are currently locked in a legal battle to recover loans worth more than Rs 9,000 crore for funds given to Vijay Mallya-promoted Kingfisher Airlines.
India ranks 130 in the World Bank’s Ease of Doing Business index, mirroring the complex rules that govern the country’s business landscape. Winding up a sick company in India, on an average, takes four years, or twice as long as in China.
Minister of state for finance Jayant Sinha said the code was “transformational” and would help improve India’s rankings in the ease of doing business survey.
The code stipulates a 180-day deadline for an ailing or defaulting company to decide on a revival plan. If 75% of creditors agree on a revival plan, that term can be extended by 90 days. Otherwise, a firm would be automatically liquidated. A debtor could face a jail term of up to five years if found to have hidden property or defrauding lenders. Besides, bankrupt individuals could be barred from contesting elections.
On the issue of wilful defaulters, Sinha said cross-border treaties would have to be put in place.
“It should go a long way in speeding up the resolution process for stressed assets in the country,” said Varun Gupta , partner, deal advisory at KPMG India.