The government is considering setting up a special regulator to look into bankruptcy cases and may make it mandatory to take a call on whether to liquidate a company or not within 180 days, a person close to the development said.
The government is working on a new bankruptcy code based on recommendations given by the TK Vishwanathan committee, which submitted its final report to the government about ten days ago, that would tilt the balance in favour of creditors, the person said.
“Why should the government let go of national asset (company) if the management is unable to
run a company? Under the new code the main aim would be to save the asset and maximise
the value,” the person told ET.
Manoj Joshi, joint economic affairs secretary, had on Tuesday said that the government is keen to present the Bankruptcy Law in the winter session of Parliament. “We are putting a lot of focus on administrative mechanism by which the bankruptcy enforcement could take place,”
Joshi said at a FICCI seminar in Mumbai.
People close to the development said the committee recommendations, if accepted, could give a leeway for many special situation funds to operate profitably in India. Special situation funds normally buy stake in distressed assets and then try to turn them around, making profit on the
upside and then selling the stake.
This is quite difficult in India currently as there is no bankruptcy law which could give a freehand to such funds. Although there are many laws such as the SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002) and the Sick Industrial Companies Act, they are tilted towards promoters, industry trackers said.
While the Reserve Bank of India’s new structural debt restructuring (SDR) rules have been introduced, they only benefits banks and not other lenders. The bankruptcy law would try to protect rights of all the stakeholders in a company and wherever needed even go for “automatic liquidation”, said the official quoted earlier.
“Under the new bankruptcy code even unsecure lenders would see their rights being protected. Also till the time the decision is taken by the regulator, the assets of the company would be frozen,” the person said. Industry trackers said such a code could make India more attractive for foreign investors and called for an insolvency framework similar to the ‘Chapter 11’ rescue mechanism in the US.
“A stronger insolvency framework will facilitate economic growth,” said Dinkar V, partner, transaction advisory services, at EY India.
“Protecting the rights of borrowers and lenders clarify the risks associated with lending and make the revival of such (bankrupt) companies easier.
These factors will also unlock the flow of much needed ‘new capital’ to stressed and distressed situations,” he said.
ET first reported on March 1 that the government was looking to bring out a bankruptcy law. Industry insiders said Indian promoters till now have been able to get a way around by not repaying money to the lenders.
Even the public sector banks find it tough to enforce the law. Some, however, warn that even the new code could end up ineffective. “A Chapter 11-like law is a welcome move, but one has to follow it in letter and spirit,” said Anand Desai, managing partner at DSK Legal.
The bankruptcy committee was set up last year under former law secretary TK Vishwanathan to find out ways for resolution of situations where companies were unable to protect interest of all stakeholders