A SMOOTH bankruptcy process is akin to reincarnation: a company at death’s door gets to shuffle off its old debts, often gain new owners, and start a new life. Might the idea catch on in India? A first wave of cadaverous firms are seeking rebirth under a bankruptcy code adopted in December 2016. In a hopeful development, tycoons once able to hold on to “their” businesses even as banks got stiffed seem likely to be forced to cede control.

India badly needs a fresh approach to insolvent businesses. Its banks’ balance-sheets sag under 8.4trn rupees ($130bn) of loans that will probably not be repaid—over 10% of their outstanding loans. But foreclosure is fiddly: it currently takes over four years to process an insolvency, and recovery rates are a lousy 26%. Partly as a result, bankers have often turned a blind eye to firms they ought to have foreclosed on.

This is bad for the banks and worse for the economy, which has slowed markedly, in part as credit to companies has dried up. The problem festered for years, not least because banks’ reserves of capital were inadequate to cover the losses that would have resulted if they had acknowledged dud loans. And bosses at state-owned banks, where most of the problems lie, feared even sensible agreements to lower an ailing company’s debt burdens could be painted as cosying up to cronies.

The Indian authorities have, in stages, removed roadblocks to resolving all this. From 2015, banks were forced to acknowledge which loans were “non-performing”, having spent years expertly sweeping problems under the carpet. Bank-capital levels are being bolstered (albeit with money borrowed from the banks themselves). And the infrastructure for the new bankruptcy code, which requires administrators to run firms in limbo and a new courts system, is being created from scratch. Lenders loth to foreclose on welshing tycoons are being left with no choice; a dozen deeply distressed firms were shunted into insolvency proceedings by the authorities in June. These account for under 3% of all loans, but over a quarter of those in arrears, reckons Ashish Gupta of Credit Suisse. All told, nearly 400 companies big and small are going through the process, establishing a first batch of precedents. To ensure that no side delays proceedings, the new code says that if creditors and borrowers cannot agree on how to revive the company within 270 days, its assets will be sold for scrap. But the assumption had been that the companies’ “promoters”, as India dubs founding shareholders, would find a way to stay on. Many were planning to bid for their old assets in auctions few thought they would lose, given the mass of inside information they hold. The government has now banned any defaulting promoters from bidding, which means they will lose “their” companies to new owners. This is a startling reversal of fortunes for a clique of businessmen who have held on to companies through multiple past restructurings, and whose number includes some of corporate India’s grandest names. An appeal seems inevitable; or a workaround, such as getting a friendly third party to bid on behalf of the old owners (though this is specifically banned).

Critics fret that excluding promoters will mean banks will get less money for the foreclosed assets, and so increase the bail-out burden that will ultimately fall on the public purse. Some entrepreneurs fail for forgivable reasons—in industries such as steel, commodity-price swings can up-end even well-managed firms. But often promoters regard loan repayment as optional. The blanket ban on all of them may seem blunt. But it is a price worth paying to level a pitch that has long been queered in the tycoons’ favour. No longer, says a banker: “I have never seen anything like it. All the promoters are scared to death.”