Among the first important reform measures that the Narendra Modi-led government has taken is a bankruptcy Bill (Insolvency and Bankruptcy Code, 2015), which will be tabled during the Budget session of Parliament. Most of the moves of the Modi government have been to preserve the status quo or simply bring a better version of the previous government’s schemes. A comprehensive bankruptcy law is its own idea and it has moved with speed to formulate and implement it. I am not sure of the opposition it will evoke among the Congress and other parties, because they would perhaps have no vested interests to defend, or issues to capitalise on, just now. Bankruptcy is arcane stuff for them. Hopefully, the Bill will get passed. If it does, the government would have taken a big step to align India with the developed world in creating a better legal framework for doing business, at least on paper.
India has no single law dealing with insolvency. Insolvency of individuals is covered by the Presidency Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920. Liquidation of companies is handled by the high courts under the Companies Act. But in parallel, we have the Sick Industrial Companies Act, 1985; Recovery of Debt Due to Banks and Financial Institutions Act, 1993; and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Sarfaesi). The last two laws were brought in to help banks recover their money after bad loans had become a massive problem each time. But this has meant that four different agencies – the high courts, the Company Law Board, the Board for Industrial and Financial Reconstruction (BIFR), and the Debt Recovery Tribunals (DRTs) – are all engaged in fixing bad loan issues, leading to delays and corruption. Bankers and the regulator have falsely and conveniently used this assortment of agencies and inadequate laws to explain why bad loans of public sector banks (PSBs) are high. Under the bankruptcy Bill, corporate insolvency would have to be resolved within 180 days, extendable by 90 days.
One of the most significant provisions of the Bill is the waterfall provision. For the first time in India I see government dues coming last. Under the Bill, liquidation proceeds will be paid in the following sequential manner: secured creditors, workmen’s dues for 12 months, employees other than workmen, unsecured creditors. After all this come government taxes — and that too for only two years; then other debts, preference shareholders and equity shareholders. If the government has thought this through and agreed to stand almost last in the queue, that is a very refreshing change and in sharp contrast to the bullying it does in every other aspect.
The biggest beneficiary of the bankruptcy laws could be PSB shareholders. PSBs dominate the economy but the top 30 bad loans account for about Rs 90,000 crore, or 36 per cent of total gross NPAs of PSBs. Therefore PSBs need equity capital injection of Rs 2.4 lakh crore by 2018 to meet Basel-III norms, according to one estimate. The RBI governor and a few bankers have blamed such colossal bad loans on the lack of a bankruptcy law. The question is: Why are the operations of private sector banks are not badly hampered by the absence of bankruptcy laws? Bad loans in PSBs are five per cent of their total lending while in private sector banks the figure is just 1.5 per cent. The reason for such colossal bad loans is corruption, meddling politicians, crony capitalism and regulatory failure. Will a new law change this? Consider some of the problems with the new Bill.
The biggest issue, from what I could gather, is that none of the existing laws are being repealed! Someone has politely commented that there must be a clear demarcation as to when these laws apply and clear overriding provisions in cases of conflict with the code. This is a naïve expectation. If these laws are not repealed, we will certainly create a far bigger mess than we have now.
Second, a whole new regulatory superstructure called the “Insolvency and Bankruptcy Board of India” is being proposed to regulate professionals, agencies and information utilities engaged in resolution of insolvencies, and also a fund to be called the Insolvency and Bankruptcy Fund. This is another Securities & Exchange Board of India (Sebi) in the making — with all the sloth, dubious practices, influence-peddling that has made Sebi largely ineffective, with successively mediocre chairmen heading it.
Third, bankruptcy professionals can probably explain it better; but, from what I could gather, there is a good chance that players in the system will gang up, technically terminating “insolvency” after 180 or 270 days, and then feeding off the corpse, under the benign supervision of the “regulator”. The Bill must be thoroughly amended, preferably by bringing in experts from advanced countries that have a well-oiled system of handling bankruptcies, including creating a distressed debt market. We have paid a heavy price so far for trying to have a flawed Indian solution, with a big role for the government in dealing with every problem in the financial sector.
The writer is the editor of www.moneylife.in
Twitter: @Moneylifers
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
