India will soon have a modern law 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 archaic bankruptcy rules, and will enable easier exit for companies that have failed because of various reasons, including unforeseen developments such as a global financial crisis.
On Wednesday, a government panel released the first draft of a proposed bankruptcy law modelled on the USA’s tested Chapter 11 bankruptcy code, which handholds insolvent companies and aids banks that would have lent to such companies.
The Bankruptcy Law Committee, headed by former law secretary TK Vishwnathan, proposes a 180-day timeline for dealing with applications for resolving insolvency, besides early identification of financial stress in companies which could help in their revival. The new norms would allow easy exits for companies while protecting the rights and interest of lenders.
According to the panel, if the proposals are implemented, it will increase GDP growth by fostering the emergence of a modern credit market. More credit will be available to new firms, including those which lack tangible capital.
A draft bill, prepared by the committee, has consolidated the existing laws relating to insolvency of companies, limited liability entities, unlimited liability partnerships and individuals into a single legislation.
“My endeavour would be try and introduce it (the bill on bankruptcy law) in the next session of Parliament,” Jaitley said on Wednesday.
The finance ministry has put up the reports on its website for public comments.
“The reforms will significantly reduce the time taken for insolvency proceedings in India, which at present, on an average basis is estimated at about 4.3 years against only 1.7 years in high-income OECD countries,” said Chandrajit Banerjee, director-general, CII.
The report has also suggested that an insolvency resolution plan prepared by a resolution professional has to be approved by 75% of financial creditors.
(With agency inputs)