CAPITALISM without bankruptcy, an old saying goes, is like Christianity without hell. In India, even the pursuit of bankruptcy can be an agonising affair. The World Bank reckons that it takes more than four years to wind up an ailing company here, almost twice as long as it does in China. The recovery of debts, too, is stuck at just 25.7 cents on the dollar, among the worst in emerging economies. Kingfisher, once India's second-biggest airline, provides an illuminating example. The company was grounded in 2012 with debts of over $1.5 billion. But it was not until February of this year that its long-suffering creditor banks got their hands on its former headquarters in Mumbai. Nearly 60,000 bankruptcy cases languish in India's overburdened courts. Why are India's bankruptcy laws so broken?
India does not have a single bankruptcy code but an assortment of laws that govern insolvency. Some outmoded laws allow for a defaulter to be jailed for failing to repay as little as 500 rupees ($8). Creditors are also entitled to confiscate possessions for defaulting on loans of only 300 rupees. Small wonder that once, when a Hindu merchant could not pay his debts, he would announce his insolvency to the village by placing a burning lamp of ghee (clarified butter) outside his door and then fleeing with his family in the night. The next morning, villagers would mourn the loss of a friend and watch creditors take his house.
India’s contemporary bankruptcy procedures are not so brutal, but they are not so efficient, either. The system operates at a painfully slow pace as courts try to interpret a variety of conflicting laws that cover insolvency. For instance, some laws forbid creditors from taking any legal action against the defaulter until a restructuring plan is in place; that can take several years. In the meantime, owners of sick companies retain day-to-day management control and often prolong court proceedings as nervy creditors watch the value of their assets dwindle—if they have not already been stolen. It is also common for defaulters to start another business under their relative’s name by siphoning off business from the old one. Insolvency protection for debtors, too, is similarly flawed. Ailing companies have to wait until their net worth is reduced by half before they qualify as “sick”. Some creditor-friendly laws are all too keen to liquidate such firms rather than restructure them. A few others conflict with regulations on land and labour which prevent the selling of property or the laying off of workers at factories.
This month India’s finance ministry floated a proposal for bankruptcy reform that would supplant the current mess and create a single system designed to reduce conflicts among creditors. In addition to banks and financial institutions, it should, for the first time, rank unsecured lenders ahead of the government in getting paid out. Such a comprehensive overhaul cannot come too soon. The finances of many companies and the banks that fund them are in rotten shape. Some 12% of all loans disbursed by India’s public sector banks are troubled. This is a sizable number, given that public sector banks account for 70% of all loan stock. In light of that, it helps that the new bill proposes to speed up both recoveries and restructuring procedures. It gives a hard deadline of 180 days to decide the fate of an ailing firm and an extra 90 days if the creditors so wish it. Courts are not the only laggards however. When the government tables the bankruptcy reform bill in the parliament later this month, it will need to impose strict deadlines on itself, if it is to bring any new law into being.
