India moves forward with new bankruptcy law

Speedy liquidation and faster decision making under the Insolvency and Bankruptcy Code will help improve the ease of doing business in India.

Both houses of the Indian parliament have passed the Insolvency and Bankruptcy Code 2016, which focuses mainly about how creditors can best recover claims from a company in financial distress.

The new bill seeks to consolidate a number of existing insolvency laws into a single piece of legislation, which would cover all entities, from companies to limited partnerships and individuals.

A fundamental feature of the code is that it forces troubled companies to complete bankruptcy proceedings within 180 days – a process which typically takes up to four years to resolve in India – or face liquidation. With the new law, bankruptcy processes could now begin at the first signs of distress, where creditors are entitled to apply loan defaults as small as INR 100,000 ($1,500; €1,300).

Analysts say the new time frame will help India improve its World Bank insolvency ranking, at 136 out of 189 countries in 2016.

Parveet Gandoak, an associate at Debevoise and Plimpton’s Hong Kong office, commented that the new bankruptcy law is “quite favourable for turnaround private equity firms as the strict timelines laid out provide funds clearer time horizons for investment planning”.

“The law also offers room for private equity players to finance restructurings and participate in the secondary distressed debt market with added confidence,” Gandoak said.

Lawyers, Yash Rana, Ananth Lakshman and Abhishek Krishnan, at Goodwin Procter commented: “If indeed the new streamlined bankruptcy process functions as proposed, it would represent a sweeping reform of the insolvency process and put creditors in a much stronger position. That should result in increased appetite among foreign investors to participate in this process.”

Another feature of the new law is that foreign entities can now invest up to 100 percent in asset reconstruction companies (ARCs) – businesses that purchase distressed assets, repackage and sell them in the market – that are registered with the Reserve Bank of India (RBI).

The Indian government introduced the Insolvency and Bankruptcy Code Bill in November 2015, drafted by the Bankruptcy Law Reforms Committee under the Ministry of Finance. Shortly after, a public consultation process was conducted and recommendations were received from Parliament.

Raghuram Rajan, the outgoing governor of RBI had previously said: “Closing a business also takes a long time in India – on average 10 years in India compared to 1.7 years in China. Among BRICs, India recovers the least value at the end of the bankruptcy process – 12 percent of debts – while China recovers 36 percent of debts.”

Along with the changes, the bill also proposes the setting up of a new entity, the Insolvency and Bankruptcy Board of India which will be tasked to regulate insolvency professionals and information companies.

Private equity practitioners at Goodwin Procter noted that it will take some time before the new law becomes fully operational because the government must notify procedural rules and amendments to other laws.

“The new law’s true implementation is still unclear as the National Company Law Tribunal was only recently constituted,” Gandoak highlighted. “To add to this, the whole ecosystem of bankruptcy professionals, agencies, etc. needed for the bankruptcy code to be successful is still lacking.”