When the heads of some of the largest banks in the United States met with Prime Minister Narendra Modi, the recurring answer from each of them, after the meeting was over, was a request to change the bankruptcy laws of India. What is it that they don’t like? Here are some facts:
- India currently has no consistent framework for dealing with bankruptcies. Companies in different industries face varying degrees of legal and government supervision in the liquidation process. In many instances, supervised debt restructuring occurs only when companies face imminent crisis.
- It takes up to 10 years to close a business in India (in China, it is 1.7 years).
- Typical asset recovery value in India is 12% (it is 36% in China).
Foreign Direct Investments (FDIs) are the main vehicle through which the International Banks get involved in investing in India. They need to be able to predict every outcome and plan accordingly. It is a well known fact that only 1 out of 10 startups succeed and therein lies the urgency for a robust bankruptcy law. When a dysfunctional legal system does not allow investors to secure the assets of bankrupt firms, they will think twice before investing in India again.
While the Modi government has shown every intention of passing growth friendly laws, they have been thus far blocked by a small (but vocal) opposition from the largest opposition party, Congress. The sooner Modi fixes this issue, the faster India will grow. There is no time to wait and time is of the essence as China has run into headwinds and may take a few quarters to sort it out and this is the best time (as they say in Bollywood movies – “Loha garam hai”).