May 26, 2018

Four years of Modi govt: Insolvency and Bankruptcy Code resets corporate rescue regime

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Rescuing sinking companies or exiting doomed businesses has been a pain for investors for decades. Things have turned smoother under the insolvency and bankruptcy code of 2016, that rebalanced the rights of promoters, banks, vendors and employees. A set of changes that are expected to be made to the code shortly will give home buyers a say in deciding the future of defaulting builders, along with their lenders.

Experts say the new ecosystem of bankruptcy code and tribunals across the country is a resounding success in turning around companies through various means, including changing management or ownership. The reform seeks to tackle the mountain of Rs10 trillion of non-performing assets in the banking system, that slows down investments and growth in Asia’s third-largest economy.

An efficient corporate revival or exit procedure for investors under supervision of the courts encourages swift investment decisions and, in the unfortunate event of things going wrong, enables investors to recover their capital for redeployment before its value erodes far too much.

The success of the new bankruptcy code became evident when Tata Steel Ltd in May took over Bhushan Steel Ltd, the largest NPA among 12 large defaulters that banks took to the National Company Law Tribunal (NCLT) for resolution last year. In a historic breakthrough in rescuing bankrupt firms, Tata Steel settled Rs35,200 crore, or nearly two-thirds of the money the steel maker owed to lenders. The beneficiaries include State Bank of India, the largest in the consortium of lenders. Recovering loans boosts the financial health of lenders, enabling them to make further investments.

“The Insolvency and Bankruptcy Code (IBC) has defied India’s poor track record in implementation of laws. Green shoots can already be seen as a result of the persistent effort by all stakeholders to make the code a success. A nearly perfect strategy was deployed for the launch of IBC and its sustainable progress,” said Sumant Batra, managing partner of law firm Kesar Dass B & Associates.

READ: Tax reforms in four years of Modi govt: GST makes tax evasion tougher

A robust bankruptcy regime is also likely to favourably impact India’s ease of doing business ranking. About two-fifth of the non-performing assets in the Indian banking system are at present in NCLT, of which, a large part is in the steel industry. Resolution of bad debts in the banking sector is critical for stimulating investments badly needed for the economy. Corporate affairs secretary Injeti Srinivas said in March that it will be a great achievement to reduce the time taken for resolution from 4.3 years in the earlier system to less than a year under the new code. The code allows 270 days for finalizing a corporate rescue plan.

Pavan Kumar Vijay, a founder of consulting firm Corporate Professionals, said that resolving all the 12 major bankruptcy cases presently under NCLT will fetch more than Rs1.25 trillion for stakeholders. “Resolving these cases will reduce non-performing assets in the system, boost the banking sector and encourage financial discipline among businesses. This will lead to a virtuous cycle in economic activities,” said Vijay.

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