India’s New Bankruptcy code: A Real Solution for Defaulters?

A Real Solution for Defaulters

A Real Solution for DefaultersBankruptcy code

Bankruptcy has become the serious and biggest obstacle in the path of India’s marathon run towards the top growing economy of the world. And resolving this issue is becoming a great headache for all government agencies and organizations. When a company is at death’s door, it gets to shuffle off its old debts and often gain new owners, so as to start a new life.  The  firms are seeking rebirth under a bankruptcy code adopted in December 2016. In a hopeful development, tycoons might be able to hold on to “their” businesses once,  as banks got stiffed seem likely to be forced to cede control.

India is in great need for a fresh approach to insolvent businesses. Its banks’ balance-sheets sag under 8.4trn rupees ($130bn) of loans that might not be repaid-over 10% of their outstanding loans. But foreclosure is fiddly: it currently takes over four years to process an insolvency, and recovery rates are a lousy 26%. Partly as a result, bankers have often turned a blind eye to firms which they should have foreclosed on.

This is not only  bad for the banks but worse for the nation’s economy, which has been slowed markedly, in part as credit to companies has dried up. This problem has festered for years, not least because banks’ reserves of capital were inadequate to cover the losses which would have resulted, if they had acknowledged dud loans. The state-owned banks is where most of the problems lie, feared even sensible agreements to lower an ailing company’s debt burdens could be painted as cozying up to cronies.

The Indian authorities have removed roadblocks to resolving all this, in stages; Like from 2015, banks were forced to acknowledge which loans were “non-performing”, having spent years expertly sweeping problems under the carpet. The infrastructure for the new bankruptcy code, which requires administrators to run firms in limbo and a new courts system, is being created from scratch. Over a dozen deeply distressed firms were shunted into insolvency proceedings by the authorities in June. These account for like under 3% of all loans, but over a quarter of those are in arrears, reckons Ashish Gupta of Credit Suisse. Nearly 400 companies big and small are going through the process, establishing a first batch of precedents. To make sure that no side delays hurdles the proceedings, the new code says that if creditors and borrowers are not able agree on how to revive the company within 270 days, its assets will be sold for scrap.

But there had been assumptions  that the companies’ “promoters”,(founding shareholders) might  find a way to stay on. Many were planning to bid for their old assets in auctions; but the government has now banned any defaulting promoters from bidding, so it  means they will lose “their” companies to new owners. Now this is a startling reversal of fortunes for a clique of businessmen who have held on to companies through multiple past restructurings, and whose number includes some of corporate India’s grandest names. An appeal  which seems unavoidable; or might workaround, like getting a friendly third party to bid on behalf of the old owners (though this is specifically banned).

Critics are concerned that excluding promoters might lead to banks getting less money for the foreclosed assets, and so increase the bailout burden that would ultimately fall on the public purse. Some entrepreneurs can be fail for forgivable reasons— as in industries such as steel, commodity-price swings can up-end even in well-managed firms. But often these promoters regard loan repayment as optional and  the blanket ban on all of them might seem blunt. But it is a price worth paying to level a pitch that has long been queered in the tycoons’ favor.

Let’s see how things goes on, and hope all the changes made would lead in progressing economy and better future of India. We all hope for a developed nation with better standard of living that can only be achieved with well growing cycle of economy.