A greater market role in bankruptcy process :

A greater market role in bankruptcy process :

(Live Mint, Editorial) (A smart expenditure for bankruptcy process)

Context :

• To tackle private investment in India, the government should come up with a bankruptcy law which would help businesses exit sooner and capital to be reassigned faster to productive firms, thereby improving economic output and employment.

Introduction :

• India’s new bankruptcy law, circulated last year, while marking a positive departure from the old and fragmented system that existed earlier, is far from ideal.
• This new law provides for appointing an insolvency professional (IP) to conduct the process.
• But research has shown that this approach leads to higher bankruptcy costs.
• It also leaves too much discretion in the hands of the IP who, in India’s case, is likely to have much less knowledge and experience in this domain.
• Furthermore, the National Company Law Tribunal (NCLT), the adjudicating authority for all corporate default cases, would be tasked with resolving as many as 25,000 bankruptcy cases over and above other corporate cases.
• And it may take more than seven years for the NCLT to clear these many cases.

The proposed solution :

• Recently economists have proposed a radical, market-friendly approach to the resolution of the bankruptcy process.
• According to the proposal, a much better bankruptcy system would be one that encourages decentralization, reduces the role of courts or insolvency professionals, and allows for a greater role for the markets.
• In this system, the courts would only have a supervisory role.
• This would do away with the need to establish and maintain specialized bankruptcy courts, insolvency professional agencies, or even experts for operating the firm.
• It would also remove the scope for discretionary decisions by IPs.

Suggestion :

• For India to improve its rankings in the doing business index, it is not enough to simply have a bankruptcy code in place.
• The code must be strong, decentralized, less costly, inclusive and speedy.