Lok Sabha passes bankruptcy bill, over to Rajya Sabha now

The Lok Sabha today approved the bankruptcy bill, which promises to enable creditor banks recover overdue loans from failed companies faster, either through infusion of funds or winding them up before the value of underlying assets get eroded.

The new bankruptcy code is a crucial step towards establishing a debt resolution regime to strengthen the hands of banks seeking to recover $120 billion in troubled loans.

The Insolvency and Bankruptcy Code 2016, passed by a voice vote, is expected to be approved by the Rajya Sabha next week as the opposition Congress party has pledged its support.

The government proposes to repeal an ineffectual, century-old insolvency law and amend 11 laws dealing with defaulters, which will enable the creditors to take most decisions and thus help faster rehabilitation of companies.

The new bankruptcy code is a crucial step towards establishing a debt resolution regime for banks, mostly state-run, seeking to recover Rs77,000 crore ($120 billion) in stuck loans.

The government will repeal an ineffectual, century-old insolvency law and amend 11 laws now dealing with defaulters to give shape to the new bankruptcy code.

The bill, once it becomes law, will improve liquidity in the banking sector and credit flow. The banking sector has been lobbying for an effective bankruptcy code for long since the existing mechanisms such as SARFAESI Act and Debt Recovery Tribunals haven't been helping much for faster recovery.

Minister of state for finance Jayant Sinha said the code was "transformational" and would help India improve its 130th ranking in a World Bank survey on the ease of doing business.

The World Bank estimates that winding up an ailing company in India typically takes four years, or twice as long as in China, with an average recovery of 25.7 cents on the dollar, one of the worst among emerging markets.

Once adopted, the code would aim to hasten debt recoveries and restructurings by setting a deadline of 180 days to decide the fate of a company that defaults.

If 75 per cent of creditors agree on a revival plan, that term can be extended by 90 days. Otherwise, a firm would be automatically liquidated.

A debtor could be jailed for up to five years for concealing property or defrauding creditors under the new law. Bankrupt individuals would be barred from contesting elections.