Wednesday, July 1, 2009

Corporate Bankruptcy Law in India

In India, there is no comprehensive law or market mechanism that governs corporate bankruptcy. The way it has been defined, ‘industrial sickness’ goes beyond the general understanding of ‘bankruptcy’. It has been defined as the extreme state where accumulated losses exceed the net worth. The stringent policies that dealt with the industrial undertakings until late 1980s fueled the persistence of industrial sickness in the country. The MRTP act (1969) prevented the private sector companies from attaining globally competitive scales of operation through its stringent definition of ‘dominant undertaking’. The FERA (1973) and Import Substitution policies that were adapted created the insurmountable hurdles to the domestic entities in acquiring the innovative technologies and forced them far behind in modernization process. This resulted in the widespread industrial sickness thereby blocking of scarce resources in unviable activities. To deal with the industrial sickness, the Government of India took various ad-hoc measures such as constituting Industrial Reconstruction Corporation of India Ltd (IRCI) in 1971; setting up of state level inter institutional committees (1980) to provide rehabilitation assistance to sick and closed units. These ad-hoc measures were not effective as they could not forge the coordinated approach to deal with the problem. In 1981, the RBI set up a committee under the chairmanship of T. Tiwari to suggest on the possible legal options/mechanisms to effectively deal with the problem of industrial sickness.

Based on the recommendations of the Tiwari committee, the Government of India enacted the Sick Industrial Companies Act (SICA) in 1985. The purpose of SICA has been the early detection of sick or potential sick companies; determination of the potential viability and timely provision of remedial measures. The economic underpinning behind the purpose of SICA is to unveil the scarce resources that were hitherto blocked with the unviable unit. In order to implement various provisions of SICA, Board of Industrial and Financial Reconstruction (BIFR) was set up in January 1987 and became functional from May 1987. Initially BIFR covered only private entities, the government companies were brought under the BIFR jurisdiction in July 1991. The SICA applies to the companies satisfying the following criteria:

  • Companies specified in the First Schedule to the Industries (D & R) Act, 1951, except the industries relating to ships and other vessels drawn by power
  • Companies not being ‘small scale industrial undertakings or ancillary industrial undertakings’ as defined in Industries Act, 1951.

The criteria that BIFR follows in determining the sickness of a particular company is as follows:

  • The accumulated losses of the company to be equal to or more than its net worth.
  • The company should have completed five years after incorporation under Companies act, 1956. (before July, 1991 it was seven years)
  • The company should have 50 or more workers on any day of the 12 months preceding the end of the financial year.
  • It should have a factory license.

The companies satisfying the above criterion are reviewed by the body of experts who determines the viability of the company. Based on the observations, unviable companies are winded up and potentially viable companies are recommended for the re-organization process. The companies that underwent the re-organization process will be declared as ‘no longer sick’ as and when their viability is established (as and when their net worth becomes positive).

Reference:

- T.C.A. Anant and Omkar Goswami (1997), “Getting Everything Wrong: India’s Policies Regarding ‘Sick’ Firms” in Dilip Mukharjee (ed), Indian Industry: Policies and Performance, OUP, New Delhi.

- www.bifr.nic.in.


Suggestions and comments will be encouraged!

1 comment:

Murali said...

Interesting read indeed!