India takes steps to overhaul creaking bankruptcy code

Wednesday 11th May 2016 05:44 EDT
 

With India obsessing over drinks tycoon Vijay Mallya's unpaid debts, the Parliament is in the works of moving a law to overhaul its bankruptcy procedures to give security to the investors and lenders. Mallya's case was mentioned and used as an instance to pass the bill which will drive troubled companies to resolve bankruptcy proceedings within 180 days, or face liquidation.

Mallya has been spending the past two months in the UK in what he calls “forced exile”. “We do not want any more Vijay Mallyas to come back, take the banks for a ride, and escape the country,” said lawmaker Gaurav Gogoi. Data compiled by the World Bank suggested that insolvency proceedings typically take more than four years to resolve in India, as compared to one year in the UK. Tens thousand cases remain pending in the debt recovery tribunals. The new law will provide an overarching framework to ensure all cases are resolved within the allotted days. If the law is accomplished, India could become one of the world's fastest-moving bankruptcy regimes.

Reserve Bank of India governor Raghuram Rajan said, “Till recently the threat that banks could go to bankers and say take 25 paise on the rupee, otherwise I will see you in a court for the next 15 years.” The new legislation visibly erodes the power of “promoters”, or controlling shareholders, of distressed companies. During the process, the control of such companies will go to a new class of “insolvency professionals” who will be accountable to a committee of creditors. If the controlling shareholders are found to have stripped assets in the year before the process, they will face up to five years in prison.

However, it was pointed out that the bill will benefit borrowers more broadly by freeing up new channels of credit. It also said the new provisions could reinvigorate India's corporate bond market, where the value of securities outstanding was equivalent to only 9 per cent of gross domestic production in 2014 as per the International Organisation of Securities Commissions.


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