The Bankruptcy Law Reforms Committee has submitted its final report to the Centre, including a draft Insolvency and Bankruptcy Bill. The bill aims to bring in a modern framework to deal with bankruptcy and insolvency of a variety of economic players, including individuals, but excluding financial firms. It seeks to replace the myriad legislation currently in force, including century-old laws governing personal insolvency. This is a much overdue reform and Finance Minister Arun Jaitley must make good on his budget promise to bring it in this winter session of Parliament. India ranks an abysmal 136 out of 189 countries in “resolving insolvency” in the Doing Business 2016 report — on average, secured creditors in India recover 25.7 cents for every dollar of credit from an insolvent firm at the end of insolvency proceedings, which take 4.3 years to conclude. This is in contrast to the OECD countries of 72.3 cents and 1.7 years.
The fact that creditors are relatively powerless when faced with default and promoters are, in the words of RBI Governor Raghuram Rajan, able to “insist on their divine right to stay in control” tends to chill the market for credit. As a result, credit in India is limited to a few large companies and secured loans. The draft bill attempts to restore some power to creditors, whether financial or operational — even, say, sugarcane farmers who are owed arrears by a mill or unpaid employees would count as creditors — by allowing them to initiate the insolvency process, eliminate the possibility of forum shopping, and hand over the steering wheel to a committee of financial creditors, which would be bound to dispose of the case in 180 days.
