Economic Survey 2018: Implementation of bankruptcy process to be key to kick-start private investment

MUMBAI: Quick resolution of stressed assets at the National Company Law Tribunal (NCLT) holds the key to kick-starting private investment which has been lacklustre for years, failing which uncertainty will shroud the bankruptcy process, the Economic Survey for 2017-18 said.

“Timeliness in resolution and acceptance of the IBC solutions must be a priority to kick-start private investment. The greater the delays in the early cases, the greater the risk that uncertainty will soon shroud the entire IBC process.’’

Chief economic adviser Arvind Subramanian also suggested that the government may have to be prepared to provide more resources to stateowned banks as they take a bigger hair cut in the resolution process as the values have collapsed, , the ongoing process of asset quality recognition uncovers more stressed assets and if new accounting standards are implemented.


Last year, the government, through the Reserve Bank of India, pushed banks to adapt the Insolvency and Bankruptcy Code to recover loans which have been long overdue. RBI ordered banks to initiate bankruptcy proceedings against scores of companies, including top ones such as Essar Steel, Bhushan Steel and Videocon Industries. At least 525 cases have been registered under the corporate insolvency procedure. Steel, retail and capital goods industries topped the list of companies being tried under the NCLT courts.

“A major factor behind the effectiveness of the new Code has been adjudication,’’ said the Survey. “The Code prescribes strict time limits for various procedures under it. In spite of the large inflow of cases to NCLT benches across India, these benches have been able to admit or reject applications for CIRP admissions with few delays.’’

Steel sector tops the list of defaulters in the bankruptcy courts with claims of Rs 57,001 crore, followed by retail at Rs 12,719 crore, and capital goods, non-electrical equipment at Rs 4,785 crore. Among corporates, Lanco Infratech, a company owned by a former member of parliament, owes lenders as much as Rs 51,505 crore, followed by Essar Steel at Rs 50,778 crore. But as a group, Bhushan owes about Rs 1.04 lakh crore between Bhushan Steel and Bhushan Steel & Power.

A recent amendment to the bankruptcy law that barred unscrupulous promoters was necessitated by fears that those who ran a company aground may end up regaining control at a cheaper rate. “Thrust of the Bill is to prevent a range of undesirable persons from bidding for the debtor,’’ said the Survey. “The Bill may prevent promoters from bidding for their own firms. A resolution plan would typically involve significant haircuts on part of financial and operational creditors. Thus, allowing a promoter to bid without restriction would mean countenancing a situation where an owner, having driven a firm into insolvency, is now able to purchase it back at a discount. This can lead to a situation of moral hazard.’’