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Business News/ Opinion / A bankruptcy code that works for all
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A bankruptcy code that works for all

Lawmakers must look beyond vested interests of promoters and unions

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

Last week, heavy industries minister Anant Geete told the Lok Sabha that Air India, MTNL and Hindustan Shipyard were among 65 public sector units that were sick based on official guidelines. These white elephants have incurred losses worth 50% or more of their average net worth during four preceding years and should be the first port of call for applying the proposed bankruptcy code that finance minister Arun Jaitley promised during his budget speech last month.

Jaitley’s promise of a code that will “meet global standards" and provide “necessary judicial capacity" isn’t a day too soon even as creditors, including public sector banks, struggle under a mountain of non-performing assets with four of the five largest lenders in the country reporting higher bad loans in 2014.

The consequences of letting an unviable entity continue to muddle through can be seen in the fate of Air India. In 2004, the government’s divestment panel had recommended that the government sell 51% of its stake in Indian Airlines, which was by then a case for Board for Industrial and Financial Reconstruction (BIFR), with massive losses that had completely wiped out its net worth. Instead, after a complicated series of manoeuvres, it was merged into another stricken entity, Air India. Now the merged entity is also in the ICU.

The task of the bankruptcy law reform committee (BLRC) is straightforward: to replace the Sick Industrial Companies Act (SICA) as well as the BIFR Act, which have been consummate failures in achieving the objective of providing a sound bankruptcy structure. BIFR, which was supposed to be India’s answer to Chapter 11 of the US bankruptcy code, has ended up serving only the interests of the promoters while giving a short shrift to those of the lenders. SICA in any case applies only to the manufacturing sector and, introduced in 1985, missed the services sector revolution that came later. In either case, the first aim of a bankruptcy law, to help the stricken company restore its financial health, has rarely been met. Indeed, lender-mandated corporate debt restructuring packages have been far more effective as in the case of companies such as JSW and Essar Steel.

The BLRC in its interim report released in February, has emphasized that viability should be the most important consideration for the company to be rescued. An effective bankruptcy law isn’t just about helping the creditors recover their loans, however much that might be their priority. It is also about ensuring that the assets of society—credit, land, even the right to run a service—are made available to those who can put them to best use. Bankruptcy provisions thus incorporate a very important element—the transfer of management rights of an inefficiently run agency to another entity that can nurse it back to health. This takes various forms, breaking up the assets and redistributing them or transferring them to another healthy entity or turning the entity into a more efficient one through corporate re-structuring. There is reasonable data to show that an effective law, which can ensure such restructuring will, in the long run, leads to greater investment and stepping up of credit disbursal by making creditors feel more secure.

In 1978, the US Congress enacted the bankruptcy code which is codified as title 11 of the United States Code and is the uniform federal law that governs all bankruptcy cases. The primary goal of this is to give debtors a financial “fresh start" from burdensome debts, a point made by the US Supreme Court in a 1934 decision Local Loan Co. v. Hunt, when it said that the act seeks to give “to the honest but unfortunate debtor…a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt". Chapter 11’s two great successes have been General Motors and Chrysler. That’s because the aim of the provisions of the law has been to restore a company to health.

Bankruptcy has been a vexed issue in India for many decades now. Various hurdles have, however, prevented the emergence of an unambiguous and effective piece of legislation on the subject. Efforts in the past to provide for a “broader and more balanced corporate rescue procedure" have failed to be notified or faced prolonged litigation. It is thus a historic opportunity for lawmakers to finally give the country a piece of legislation that looks beyond the vested interests of promoters and organized labour.

Why has bankruptcy protection been weak in India? Tell us at views@livemint.com

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Published: 17 Mar 2015, 05:59 PM IST
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