The NDA government’s plan to introduce a bankruptcy law that will allow a smooth and quick shutdown of unviable companies is a timely one which can dramatically improve India’s rank in the Ease of Doing Business stakes.
Union finance minister Arun Jaitley, keeping his budget speech intent, hopes to introduce a Bill in Parliament at the earliest to amend an archaic British colonial law governing insolvency that goes back to 1909, giving effect to an expert panel report.
The plan, under its released draft, is to bring down the time period taken to possibly shut down a company to an average of 180 days from an application date whereas on an average India takes as much as 4.3 years to do so — twice as much as China, whose growth rate India wants to emulate and surpass, and 1.7 years in developed economies. The proposed Bill, fashioned on US provisions, aims for a “clear, coherent and speedy process for early identification of financial distress” and suitable action for revival or shutdown where required.
India’s legal system is notorious for laws and administrative bodies that run into each other, confusing officials, jurists and company promoters. Hundreds of sick company cases lie before the Board for Industrial and Financial Reconstruction (BIFR) as it oversees desperate attempts to revive companies that often lie in their deathbeds.
Court-supervised liquidation takes years. Quick and easy closure of unviable companies, with relief for bankers who lend to such enterprises, is a practical way out in many cases and this is what the planned law aims to aid.
However, the government will have to muster support in both houses of Parliament to get things done. India has many shades of red in Parliament, and sceptical lawmakers need to be convinced to enable legal changes.
Like in the case of the GST Bill to introduce a goods and services tax, a proactive move to build a consensus may aid a faster march to an insolvency regime that India can be proud of. This requires not just political will, but considerable legislative tact. A slow bleeding of ailing companies aids no one, be it employees, bankers, shareholders or promoters.