No easy cure for industrial sickness
It takes around 12 years to liquidate a company in India against 1-3 years in developed countries.
By TNN |
NEW DELHI: It seems that steps to stem the rot in corporate assets in India are being held hostage to vested interest of a profession. The proposal to set up a National Company Law Tribunal (NCLT) which is supposed to take up the job of the BIFR and the company courts—financial restructuring and liquidation of corporate entities— has been caught in legal entanglements for long.
If the NCLT is created, company secretaries and chartered accountants would be allowed to appear before the tribunal, in addition to lawyers. The tribunal members are also expected to be chosen from these professions.
There is strong case for urgent revamp of India’s ineffective insolvency system.
The exit process under the Sick Industrial Companies Act (repealed by Parliament in 2003 but not yet replaced by another law due to the delay in the setting up of NCLT) has proven to be frustrating. Even the BIFR-directed financial restructuring of corporate entities is extremely time-consuming and does not uneconomical. Foreign investors wanting to invest in India have a legitimate fear that if the market conditions turn adverse, they could get trapped here. And this has been a huge disincentive for FDI in India.
A recent World Bank study said liquidation of assets created in India could fetch the investor a return of just 16 cents against one dollar invested, whereas the average return is 65-70 cents in Japan and 35-40 cents in most European countries. It takes about 12 years to liquidate a company in India. In contrast, most developed countries are able to complete the process in 1-3 years.
The Irani Committee on new company law had recommended privatisation of the insolvency process which is now handled by a few overburdened “company courts” (designated high courts) and official liquidators, who often lack domain knowledge. It is crucial that during the liquidation process, the assets are protected from deterioration to enable their efficient re-deployment and distribution.
The new companies Act is expected to have a separate chapter to deal with insolvency. The idea is to engage professionals in the management and valuation of assets, special audits, investigation etc. and also equip the adjudicator (the tribunal) with domain expertise.
At the other end of the scale, the SICA provisions are often abused by the promoter to seek protection and moratorium from recovery proceedings. Due to the delays in dissolution of the company which require the sanction of a few overburdened “company courts,” an enormous chunk of the corporate assets in India lies dormant.
If the NCLT is created, company secretaries and chartered accountants would be allowed to appear before the tribunal, in addition to lawyers. The tribunal members are also expected to be chosen from these professions.
There is strong case for urgent revamp of India’s ineffective insolvency system.
The exit process under the Sick Industrial Companies Act (repealed by Parliament in 2003 but not yet replaced by another law due to the delay in the setting up of NCLT) has proven to be frustrating. Even the BIFR-directed financial restructuring of corporate entities is extremely time-consuming and does not uneconomical. Foreign investors wanting to invest in India have a legitimate fear that if the market conditions turn adverse, they could get trapped here. And this has been a huge disincentive for FDI in India.
A recent World Bank study said liquidation of assets created in India could fetch the investor a return of just 16 cents against one dollar invested, whereas the average return is 65-70 cents in Japan and 35-40 cents in most European countries. It takes about 12 years to liquidate a company in India. In contrast, most developed countries are able to complete the process in 1-3 years.
The Irani Committee on new company law had recommended privatisation of the insolvency process which is now handled by a few overburdened “company courts” (designated high courts) and official liquidators, who often lack domain knowledge. It is crucial that during the liquidation process, the assets are protected from deterioration to enable their efficient re-deployment and distribution.
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The proposed National Company Law Tribunal promises to addresses most of these issues, but the formation of the tribunal itself has created a row and is stuck in the Supreme Court. Says Sumant Batra, a leading corporate lawyer, “The NCLT would handle both restructuring and winding up of companies. It could pave way for a new insolvency system which is professional and responsive to the market realities.”The new companies Act is expected to have a separate chapter to deal with insolvency. The idea is to engage professionals in the management and valuation of assets, special audits, investigation etc. and also equip the adjudicator (the tribunal) with domain expertise.
At the other end of the scale, the SICA provisions are often abused by the promoter to seek protection and moratorium from recovery proceedings. Due to the delays in dissolution of the company which require the sanction of a few overburdened “company courts,” an enormous chunk of the corporate assets in India lies dormant.
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