New Delhi: A draft law that will allow for the faster closure of troubled businesses and give investors an easy exit is likely to be ready by mid-October, bringing India closer to putting in place a bankruptcy law.

Once promulgated, the bankruptcy law will also considerably improve the ease of doing business in India—a key focus of the National Democratic Alliance (NDA) government.

An information database storing all information about a company and its debtors to help in early detection of deteriorating financial health and creation of a new class of insolvency professionals to assist in the turnaround of a sick company will be among the key features of the proposed law.

A committee headed by former law secretary T.K. Viswanathan was set up last year and tasked with formulating a bankruptcy code. It submitted an interim report earlier this year.

“We have agreed on the broad framework and the drafting process is on. We should be able to give the draft legislation to the finance minister by middle of October," said Viswanathan.

The bankruptcy code is aimed at creating an overarching framework to make it easier for sick companies to either wind up their business or engineer a turnaround, and for investors to exit. It will also propose a framework for addressing insolvency issues faced by individuals and partnership firms.

A bankruptcy code, like the one in the US, has been one of the key demands of industry faced with long delays in exiting a business. Reserve Bank of India (RBI) governor Raghuram Rajan is a proponent of this legislation.

India hopes that enactment of a bankruptcy code will improve its ranking in the World Bank’s ease of doing business index. It is currently ranked 142 among 189 countries.

“At present, by the time creditors find out that a company is in trouble, it is generally too late. We are proposing setting up an information utility wherein all the information about a company and its debtors will be available so that creditors can get early warning signals about the deterioration of the financial health of a company," Viswanathan said. “We are also looking at creating these new classes of independent professions from the existing pool of chartered accountants, investment bankers and others who will specialize in turning around companies," he added.

The committee was also addressing early detection and resolution of financial distress in companies, protection of stakeholder interests, studying the rescue mechanism for companies and suggesting ways of improving it, examining the role of institutions engaged in the process of rescue and liquidation, and the liquidation procedure for smaller companies.

“At present, if a company is mismanaged, there is no recourse available to investors. Though the recently notified strategic debt restructuring allows banks to initiate management changes, there is no such provision available for investors," said Mahendra Swarup, managing director of Avigo Capital, a fund manager and advisory firm. “A bankruptcy code will provide more options rather than just selling off a bankrupt company," he said.

The committee—which had members drawn from the departments of economic affairs and financial services; the ministries of law, corporate affairs, and micro, small and medium enterprises; RBI, and the Securities and Exchange Board of India—favours two separate entities to deal with the bankruptcy of companies and individuals and partnerships.

“We plan to use the existing infrastructure of national company law tribunals (NCLTs) that the ministry of corporate affairs is setting up. This will address issues of winding up and restructuring of companies. For individuals and partnerships, we are looking at an alternative mechanism which can decide on such cases faster than the courts," he said.

The ministry of corporate affairs, after receiving the Supreme Court’s nod in March, started the process of setting up NCLTs aimed at reducing the large number of corporate disputes pending in many courts.

Lalit Kumar, partner, J Sagar Associates, said the measure proposed in the bankruptcy code will help in recovery by creditors.

“Easily accessible information about a company’s financial health will help in improving transparency. The use of NCLTs in liquidation will help in speeding up of the process," he said.

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