The spirit of making Insolvency & Bankruptcy Law is lost. The spirit of global Bankruptcy Law is to give life-breath to entrepreneurs/ promoters without killing entrepreneurship skill and risk taking skill, not ruining the business and family and also to protect the creditors and allow utilisation of non-performing assets which had performed earlier. Entrepreneurs invest hard earned money and also funds from family, friends and relatives. Narayan Murthy of Infosys started with little money from his wife and relatives. The concept of Limited Company (private and public) has been in practice globally. They take limited liability. Limited partnership law in form of equity has also been promulgated. Douglas G. Baird, Professor of Law at the University of Chicago Law School and the author of Elements of Bankruptcy, writes, “When entrepreneurs fail, they will get back on their feet with proper Bankruptcy Law”.
Historically, businesses fail globally. Since the last two decades, business failures are due to global and internal factors. Global overcapacity, global competition, global dumping of goods, innovations, tax incentives to new ventures, rising cost of incremental wages and gratuity in the case of old units, new laws etc, affect the competitive edge of the business resulting in working fund restraints, paucity of funds for renovation and modernisation push. Instead of intensive care and giving oxygen to survive, these units are declared ‘dead’ or rather ‘sick’. How can an entrepreneur survive in India, when ‘doing business with ease’ is ranked 130 out of 189 countries in the doing business indicator?
The currently passed ‘The Insolvency and Bankruptcy Bill’ have not considered certain aspects and laws prevailing in the developed countries. It does not have supremacy over other existing laws. It requires 75% of the creditors to agree to revival plan of the unit. Banks and Financial Institutions are the major creditors. They may not agree due to fear of investigations, ulterior motives and bias. National Company Law Tribunal, which will comprise the adjudicating authorities, will be involved in time consuming affairs while assets will continue to waste and workmen thrown out of employment.
It needs to consider the reasons of sickness such as global competition, recession, slowing of global economy, over-capacity, dumping of goods by overseas countries, delay in statutory clearance, strike and labour problem, innovation, non-payment of debtors and much more by government where nothing works without cut and influences, sudden change in policies and incentives for selling new units.
How can entrepreneurs who have put in their own life savings, further stake friends’ and relatives’ money or cause the death of a unit? When the industry becomes sick, not only do entrepreneurs lose money, shareholders and all others also lose their money. So, banks need to sustain and nurture the sick industries. Banks must not burden the struggling unit by charging penal interest or high rate of interest. They should be happy with the repayment of original funding foregoing the interest, etc.
In UK, one major creditor can appoint the administrator, an insolvency practitioner to administer the unit and run it till a new buyer is found. The administrator calls for bids and gives the unit to the highest bidder. Entrepreneur is only liable to pay the amount diverted from the company. It does not work in all cases either. The losses are business losses. All stakeholders suffer. UK practice should be adopted in Insolvency and Bankruptcy Law for the sake of employment, production, use of assets and not to kill the entrepreneur and his family. Insolvency and Bankruptcy Board should be established. The Board should enlist members from a panel of eminent judges, professionals, financial institutions, chartered accountants, lawyers and industrialists. Members from cross section of expertise can judge the actual reason of stressed assets and fearlessly take decision to use the assets and continue employment.
Long-term interest of the Nation is paramount. Transparency and quickness is needed. Entrepreneurs cannot be blamed alone for sickness beyond their control. Look into public sector undertakings also where crores and crores were lost. To solve Tata’s British Steel operations UK Business Secretary Sajid Javid flew down to India and offered British government equity for the project to save massive assets and jobs of over 12000. In 2008, about 20000 UK companies became insolvent when the global economic crisis occurred. In 2015, the number of insolvent companies is 15000. In India, banks have 6% NPA while China has 20% NPA. The corporate debt of China is about 145% of GDP. China is now moving from debt to equity. What a fuss in India! Out of about six lax crores stressed assets, the original advance is less than rupee three lakh crores.
BHS, one of the largest Departmental Stores employing 11000 persons, has closed. E-retail has affected the work of many large stores. Austin Reed, whose suits have been worn by Winston Churchill, The Beatles and Christine Lagarde of the IMF, became the latest casualty. Around 120 retail stores with more than 1000 jobs having a reputation of more than 100 years will get closed by the end of July 2016.
Though India is the third largest economy, globally and accounts for 6.8% of GDP (of the world GDP based on purchasing power parity in 2014), it ranks 146 in terms of per capita GDP.
Policy makers are depending on FDI and on foreigners. Indians are going overseas where doing business with ease ranks between one to twenty five. Many countries have been adopting a resolution not to depend on foreigners. Poland, Hungary and many others are discouraging foreign investments. They do not want to remain in the trap of dependent development.
Indian corporates have been selling their assets to pay off debts and thereto lessen the burden of serving debts. It is time-consuming. In the time of slow global economy, buyers are cautious and hard core bargainers for stressed assets.
Brexit will have an effect on India’s economy. UK’s exit from European nations of 28 countries will affect UK’s economy. Indian corporates having operations in UK and other countries will also be affected. Brexit, has of course, induced a huge element of uncertainty to economies and the markets. It infers that people are tired of free trade and immigrants who shrink the jobs and dilute the culture.
Stock market may be in turmoil. Largest flow of fund has been from UK. There may be uncertainty in the flow. Indian firms in UK are cautious. Rupee may decline further against dollar.
To have the reality of “Make in India”, Prime Minister Narendra Modi has to think “Make global India”.
“Make global India” will create edge in global competitive-ness. To this end, the government has to bring down the rank of India’s ranking for ease of doing business’ to at least 20th rank, cut rate of interest, reform labour laws, laws of imprisonment for shortcomings, fines and so on.
Agriculture sector needs to be prioritised. Its contribution to GDP must increase. MNREGA, a job guarantee programme, is made available to labourers during agricultural seasons and to many other sectors like construction. All the funds available from this programme and subsidy should be diverted to irrigation and rain-water harvesting.
We all need to work hard with practical conventional wisdom to “Make Global India to succeed Make in India”.
Dr H P Kanoria