Capitalism or free
market system can be considered as the most effective way to coordinate
production and distribution. Even though India is considered as a mixed
economy, we as a nation cannot ignore the importance of free markets because on
one side mixed economy combines the elements of both free markets with state
interventionism and on the other side we are in the process of moving towards
capitalism with ebullient force. There is an old saying that capitalism without
bankruptcy is like Christianity without hell!
Even though we have come a long way, the bankruptcy proceedings in India
are still an incommodious affair. The issues that the Indian banking industry
faces over the years can be linked to the inefficiency of existing rules and
regulations.
Indian banking industry
is going through a very challenging phase. Credit growth of all SCBs declined
to 9.4 percent from 9.7 percent while the growth in deposits also declined to
9.9 percent from 10.7 percent between March 2015 and September 2015. The capital
to risk weighted assets ratio (CRAR) declined to 12.7 percent from 13 percent.
Gross non-performing advances (GNPAs) of all SCBs increased to 5.1 percent from
4.6 percent whereas the net non-performing advances also witnessed an increase from
2.5 percent to 2.8 percent. Significant portion of the stressed assets
accumulated in five sectors. They are mining, iron & steel, textiles,
infrastructure and aviation. These sectors constitute 24.2 percent of total
advances and a whopping 53 percent of total stressed assets.
The capital is really
scarce in a developing country like India and therefore it should be allocated
in such a way that it benefits all the participants. ‘Allocational efficiency’
occurs when market participants obtain capital that can be used for the most
productive purposes thereby spreading opportunities and stimulating economic
growth.
But unfortunately it
can be observed from the above statistics that we need a strong regulatory
infrastructure in place in order to provide equal opportunities to all. This
can in turn lead to creative destruction that revolutionizes the economic
structure by constantly destroying the old ones and creating new ones.
Measures
taken by the RBI towards de-stressing the banking sector
RBI has taken several
initiatives to deal with this stressed assets issue. It has created a database
for loans above 50 million (CRILIC database) and has asked the banks and NBFCs
to report the status of the loans in regular intervals. If a loan is overdue
for more than sixty days, then all lenders have to form a Joint Lenders Forum
(JLF) to assess and identify how the problems can be fixed. It has also allowed
banks to adjust repayment profiles for performing loans to infrastructure and
core sector (5/25 rule). Also, in cases of restructuring, RBI and SEBI have
together allowed banks to write in clauses that allow banks to convert loans to
equity in case the project gets stressed again. Of course these
measures are laudable and can yield better results in the coming years but at
the same time we have some other pressing concerns.
As per the World Bank
report, it takes an average of 4.3 years to resolve an insolvency issue in
India but at the same time it takes less than two years to wind up the same
issue in US or China. In extreme cases it takes around 15 years to settle the
issue in India! As a result of this, lenders in India able to recover only 25
cents to a dollar lent by them this is the worst in emerging economies.
The main reasons for
the delay in bankruptcy proceedings are
1 Existence of multiple laws
2 Authority inconsistencies among
different agencies.
In India, besides the
Companies Act, 2013, bankruptcy is dealt with by three major legislations — the
Sick Industrial Companies (SICA), the Recovery of Debts due to Banks and
Financial Institutions Act, 1993 (RDDB Act) and the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI). At the same time we have different agencies such as high
courts, company law board, board for industrial and financial reconstruction
(BIFR) and the debt recovery tribunal (DRT) and they have overlapping
jurisdiction.
So the obvious question
is how to address and overcome these issues. For that what we need is a well
drafted bankruptcy law.
The
Insolvency and Bankruptcy Code, 2015
The insolvency and
bankruptcy code, 2015 is the most awaited and the most powerful reform measure
after GST which will provide a framework for time bound resolution of corporate
bankruptcy, ensuring that stakeholder interest are protected and the assets are
put to use quickly.
Why
it is important?
In a limited liability
company as long as the company can meet its debt obligations, equity owners
have complete control, and lenders do not have any authority in deciding how
the business should run. But when default takes place, control has to be transferred
to the creditors; equity owners have no say. But unfortunately this is not how
companies work in India. For many decades creditors do not have much power when
it comes to the insolvency issue.
Features
of the proposed code
The insolvency and
bankruptcy code attempts to create a standardized insolvency resolution process
(IRP) for businesses. It helps the
creditors to decide between the possibilities such as coming up with a viable
survival mechanism or by ensuring the quick liquidation of stressed assets. One
of the important features of the proposed law is that, any creditor, whether financial or operational, should be
able to initiate the insolvency resolution process (IRP) under the proposed
code. What is meant by operational creditors? Operational creditors include
workmen and employees whose past payments are due. As per the existing
legislation, only certain parties such as any secured creditors, central and
state government, RBI, public financial institutions etc. are eligible to file
the application before National Company Law Tribunal (NCLT). Giving powers to
the operational creditors will empower the workmen and employees to initiate
insolvency proceedings, settle their dues fast and move on to some other job
instead of waiting for their dues for years together as is the case under the
existing regime.
The Insolvency
Resolution Process (IRP) will be initiated and run for as long as 180 days when
a default case happens (this can be extended 90 days further as per the
complexity of the case ). The IRP is administered by an Insolvency Professional
(IP) who is given substantial
powers. A credit committee will be formed exclusively by combining all the
affected parties and the voting rights will be proportional to the amount of
debt they hold. For the 180 days for which the IRP is in operation, the
creditors committee will analyze the company, hear rival proposals, and make up
its mind about what has to be done. The rival proposals can include various
possibilities such as taking the firm into liquidation or negotiating a debt
restructuring, or selling the firm. If, in 180 days, no revival plan achieves
support of 75% of the creditors, the firm goes into liquidation.
Why
it is important for India?
Failures are the
essential part of any market economy. It is not the failures that matters in
the market economy but what matters is how the failures are cleared and most
importantly how the failures are cleared quickly. The productive assets have to
be turned out as soon as possible in order to reap the maximum benefits. US,
one of the most efficient free market economies has a very effective Bankruptcy
Code that provides a fairly quick liquidation or restructuring of business. US
have Chapter 7, with cases being filed in bankruptcy courts; Chapter 11, which
deals with reorganization of businesses; and Chapter 15, on cross-border
insolvencies. As a result of this creditors are able to recover almost 80 cents
to a dollar in case of defaults. We are also in the process of becoming a
mature market economy. Well drafted and clearly articulated laws and
regulations are required in this process. Implementation of this can increase
the GDP growth in India by fostering the emergence of a modern credit market. It
can also possible that strong bankruptcy proceedings can improve the ease of
doing business in India dramatically. What we need is the vibrant and
innovative markets without which economies would eventually stagnate and
decline. It is possible that there are details in the new proposed Bankruptcy
Code for India which are not quite perfect. But the overall idea and the thrust
of the new legislation is excellent.
Views are personal :) Comments are welcome :)
References
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