Poor resolution of bankruptcies is a big contributor to India’s low position in the World Bank’s ranking of Ease of Doing Business. So, the government has passed a new law to deal with bankruptcy.
The Insolvency and Bankruptcy Code, 2015, a law aimed at speedy winding up of insolvent companies, lowering NPAs, and redeploying capital productively. To understand this law, we must know what bankruptcy amount to and the why the new law was required.
Being bankrupt is a state of inability to repay debts to creditors. In India’s banking industry the bad debts were piling up at banks. According to central bank data, stressed assets (which include gross bad loans, advances whose terms have been restructured and written-off accounts) rose to 14.5% of banking sector loans at the end of December 2015. That’s almost Rs 10 trillion of loans that are stuck. Freeing up this money is crucial for the banking sector to go about its business.
There are numerous of laws to deal with such issues but multiplicity of laws has been a problem in the way of banks failing to recover their loans.
Highlights of new Bankruptcy law:
- It consolidate all existing laws
- For resolving insolvency, it specifies timeframe of 180 days after the process is initiated plus 90 days extension.
Impact of the new Bankruptcy law:
- The new Bankruptcy Law will fast-track recovery of dues from defaulters and employees will be first in line to get their share from liquidation of assets.
- It will bring down drastically the time taken to wind up a sick company while making the entire process much easier.
- It will enable the recovery process to move much more smoothly and effectively.
- It will protect the workers in case of insolvency by giving first priority on paying their salaries for up to 24 months from the liquidation of assets.
- Employees’ rights (and) creditors’ rights have been dramatically strengthened and as a result, if indeed there is a default event, employees are first in line to be able to secure their rights.