Bankruptcy Code kills industry, remove MSMEs from its ambit

There has been a chorus of orchestrated support for the Insolvency and Bankruptcy Bill, 2015 (or Bankruptcy Code) in the media and from interested quarters like the big business houses, consultants etc. There has been simply no consultation with most of the MSME sector (Micro, Small and Medium Enterprises), small entrepreneurs and industrialists regarding the effect of such a draconian law on the Indian economy.

The proposed bill is being brought on the premise of ‘faster release of productive assets’, which is actually not the case. Most of the MSMEs are promoter-run units with very little presence of professionals in the organisation due to their high-costs. In such a scenario, the so called ‘insolvency experts’ (who will take over the companies on behalf of financial institutions in case of a default as per the proposed Act) will naturally not be able to run the units.

The same will be put to auctioning which, in itself, is a long and time-consuming exercise, particularly when the real estate and industrial sectors are in such a bad shape. In fact, the productive assets can be best put to use by the industry they are being used for and by none else.

As per the provisions of the proposed Bill, even a minor default will lead to the company being placed in the hands of a private ‘insolvency expert’ and will be dissolved unless 75 per cent of the creditors agree to continue the operations of the firm. More drastically, all the workers will be automatically dismissed.

The bill will only assist the minority financial manipulators and is against the economic interest of the business, public sector banks and workmen. It is as though that the bill has been drafted with the mindless attitude that “destruction is liberalisation.”

The Asset Reconstruction Companies (ARCs) have spent barely Rs 3,400 crore to acquire total assets of Rs 1.89 lakh crore of book value till date. This shows that the cosy club of ARCs have paid only 2 per cent amount to acquire the debts.

The same has to be contrasted with the approach of the banks towards entrepreneurs and borrowers to whom the banks refuse to give minor adjustments or even short moratoriums.

As per the government, the bill has been necessitated because of the failure of BIFR, working under the Sick Industrial Companies (Special Provisions) Act  (SICA) to provide relief/rehabilitation to industry as well as to the financial institutions.

The actual cause of the BIFR not being able to deliver goods has been the failure of the government in appointing adequate members on the bench which delays adjudication of matters. The SICA provides for up to 14 members, but currently only one member is sitting on the BIFR bench. 

Banks can easily prevent a company from taking recourse to BIFR and sell off the assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) which supersedes any other law. The SARFAESI Act describes itself to be ‘a law with stringent provisions’.  Then, do we need a law with even more stringent provisions?

In a socialist country like India, the continuous emphasis by the government and the finance ministry is on how fast a business can be closed and the same is being touted as a major step towards the prime minister’s initiative of `Make In India’. It is repeatedly being harped that now it takes 4.3 years to close a business; but after the bill becomes a law, it will only take six months for the same.

Closing the industry
It can be pretty well understood that the bill which thrives on ‘helping to close the businesses’, cannot nurse the industry/ business and must not be passed into a law. The proposed law is a clear-cut mockery of the initiative of ‘Make in India’.

Surprisingly, nobody seems to be bothered that almost 45 per cent of our industry is in the MSME sector and majority of them is reeling under severe recession induced due to deep industrial recession of the last few years coupled with the onslaught of cheap Chinese goods.

On account of this, the NPA figure, which stood at around Rs 89,000 crore on 31.03.12, crossed the mark of Rs 5 lakh crore as on 31.03.15 in the MSME sector. This is only a tip of the iceberg. Because for every declared NPA, there would be several NPAs, which are kept under wraps.

In such a scenario, should we be interested in nursing the MSMEs or just pounce on them, armed with such draconian laws, and close them for incurring losses due to conditions beyond their control?

The prime question which arises here is this: Should our country be run on a capitalist economic model? And if an industry has fallen on bad times due to various reasons, particularly MSMEs (where usually even the residential house of entrepreneurs/promoters is mortgaged to banks), then should they be nursed back or should we be in a tearing hurry to take possession of their assets including their residential houses, throwing them on road and causing thier workers to lose their jobs?

Basically, the Bankruptcy Code is drafted on an assumption that all the borrowers are cheats and the companies must be seized and handed over to private professionals/private insolvency consultants.

It does not contemplate the situation that most of the entrepreneurs are genuine and have invested their life-savings and life-work in their companies and sometimes may face temporary financial difficulties.

It will be better to have reliance on time-tested laws like SARFAESI and SICA instead of bringing out new legislations which are going to simply kill the industry. If at all the government wants to still go ahead with it, then the MSME sector should be kept out of its purview.

(The writer is a technocrat and a small-scale entrepreneur based in Ghaziabad, Uttar Pradesh)

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