Thursday, May 12, 2016

Insolvency and Bankruptcy Code 2016

Insolvency and Bankruptcy Code 2016 as recommended by T K Vishwanathan Committee was recently passed by Indian Parliament. Hailed as second biggest reform after GST, this code is significant because of followings :
> Overlapping jurisdictions of laws and lack of clarity in their provisions had made Indian Insolvency resolution framework a legal quagmire. This new code offers an effective and consolidated approach which will make resolution process timebound (180-270 days) and cost effective.
> Economic Survey 2015-16 notes that Indian economy is facing "Chakravyuh" challenge. Although business failures are inevitable in any economy but what makes that economy resilient is recovery rate which in turn requires strong winding up process. In this context, this code is significant.
> As an important pillar supporting ease of doing business, this code would be significant in freeing up and channelizing credit to productive sectors and attracting FDI (as lack of exit sometimes hinders entry too).
> Although not a magic wand of NPA problem but it would help significantly in destressing commercial banks.
> This code privatizes insolvency resolution process So hopefully efficiency would be there.
But there are some challenges too :
> Setting up of necessary institutional infrastructure like insolvency professionals (IPs), Insolvency and Bankruptcy Board of India ect will take time.
> Abjudication agencies (NCLT and DRT) are also facing problems. Like NCLT is yet to be set up and DRT is overloaded with case pendencies.
> Parliament Committee noted that furnishing the performance bond may deter IPs and IPAs from entering the sector.
Although its working is yet to be witnessed, passing of this code even in dysfunctional Parliament is great start.

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