Why does India need a bankruptcy law?

The failure of businesses impacts employees, shareholders, lenders, and the

broader economy.
In a country like India particularly because of delays in making decisions on
the viability of businesses, tactics employed by company promoters to delay
reorganisation or attempts to sell off assets, changes of management, or litigation
that goes on and on the drag on new business units, jobs, income generation
and economic growth can be significant.
India does have some laws including one on Securitisation and Enforcement
of Security and other mechanisms, like Corporate Debt Restructuring or CDR,
to address the problem of insolvency of firms. But the fact is some of these laws,
such as the Sick Industrial Companies Act or SICA, have not worked because of
inefficient enforcement and court delays.

So how can a modern law help?

Like in the West, a modern law with a focus on speedy closure will help firms on
the brink to be either restructured or sold off with limited pain for all involved.
In some cases, if this is done swiftly, assets can be put to good use and the firm
can be revived.
Delaying a decision on whether to shutter a firm or to try to revive it causes
destruction of value for all involved. Indian policymakers have recognised this.
For banks or lenders, the money recovered can be lent again, promoting
efficient allocation of resources, besides development of financial markets such
as a bond market with clarity on repayment for debtors.
An efficient and swift insolvency regime ensures greater availability of credit or
funds for businesses by freeing up capital, and is thought to boost innovation and
productivity.

What is the international experience?

The US has a Bankruptcy Code that provides for fairly quick liquidation or
reorganisation of business with what is popularly known as Chapter 7, with
cases being filed in bankruptcy courts; Chapter 11, which deals with
reorganisation of businesses; and Chapter 15, on cross-border insolvencies.
Individual bankruptcies are dealt with separately. In the UK, once cases are filed
for bankruptcies, after 12 months, there is either discharge with part of the
assets being used to pay off debts, or, in situations where companies can be
turned around, court-appointed administrators handle cases.

The German insolvency law is applicable to both individuals and firms, with
independent court-appointed insolvency practitioners helping in realising assets
or reorganising the business.

What is India planning?

A committee headed by former law secretary T K Viswanathan has suggested a

timeline of 180 days extendable by 90 days to deal with applications for
resolving cases of insolvency or bankruptcy.
During this period, the management of the distressed firm or debtor could be
placed in the hands of a resolution professional a new class of professionals
equipped to deal with such cases, who would be supervised by a proposed new
regulator.
The proposal also envisages them getting into talks to revive firms, and work out
a repayment plan. A Debt Recovery Tribunal will be the adjudicating authority
over both individuals and unlimited liability partnership firms.
The National Company Law Tribunal will be the adjudicating authority with
jurisdiction over companies with limited liability. The law will have to be
approved by Parliament.

What about financial sector insolvencies?

The Financial Sector Legislative Reforms Commission (FSLRC) has

recommended the creation of a resolution corporation to monitor financial firms,
and intervene before they go bust.
The aim is to either close firms that cant be revived, or change their
management to protect investors or depositors. This is important because the
failure of large banks or institutions imposes costs on taxpayers in the form of
bailouts or capital infusion.
The proposal is to promote the Deposit Insurance and Credit Guarantee
Corporaton (DICGC) as resolution corporation.

Twist: It includes tweaks to tax laws, including income tax and customs and excise
duties, thus making it a money bill, which does not require passage by the Rajya
Sabha.