Boosting Investor Confidence: Recent Legislative Steps Taken
India has been taking a number of legislative and regulatory measures for boosting the confidence of the investors and to improve the investment climate prevailing in the country. The following are some of the legislative measures undertaken by the government:
The Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016, lays down a resolution process that seeks to ensure time-bound settlement of insolvency, faster turnaround of businesses and create a unified data base of serial defaulters. The recent enactment of a comprehensive legislation relating to insolvency of corporate, firms and individuals has consolidated and amended the existing laws related to insolvency resolution and reorganization of corporate persons, partnership firms and individuals in a time bound manner. It will be applicable to individuals, companies, limited liability partnerships, partnership firms and other legal entities registered in India as may be notified, except for those with a dominantly financial function. This implies that all types of entities will come under one single law. It will also repeal the archaic laws like Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.
It creates an institutional mechanism for insolvency resolution process by setting up of Insolvency and Bankruptcy Board of India (IBBI) to regulate professionals, agencies and information utilities (IUs) engaged in resolution of insolvencies of companies. In addition, the code also provides for establishment of National Companies Law Tribunal (NCLT) and Debt Recovery Tribunals (DRT) as nodal adjudicating authorities for resolution of insolvency, liquidation and bankruptcy. Thus, the code seeks to boost interest of investors and improves ease of doing business in the country.
The term insolvency is used for both individuals and organizations. For individuals, it is known as bankruptcy and for corporate it is called corporate insolvency. Both refer to a situation when an individual or company are not able to pay the debt in present or near future and the value of assets held by them are less than liability.
The Financial Resolution and Deposit Insurance Bill, 2016 (Draft)
A draft Financial Resolution and Deposit Insurance Bill 2016 has mooted idea of “creative destruction of inefficient firms”. It seeks to address insolvency issues by establishing a framework to carry out resolution of certain categories of financial service providers in distress. It seeks for orderly resolution that protects the interests of the consumers without relying much upon taxpayer-funded bailout. It also aims to provide deposit insurance to consumers belonging to various categories of financial services and for designation of Systemically Important Financial Institutions by the Union government for resolution. Also, it provides for the establishment of a corporation for protecting the interests of the consumers of covered service providers and public funds to the extent possible thereby ensuring stability and resilience of the financial system.
The significance of the bill lies in the fact that it not only consolidates the resolution provisions present in different statutes but in addition introduces new requirements like classification of financial service providers into different categories of risk to viability, submission of resolution/restoration plans etc.
In sum, the overall mechanism provided by the draft bill is likely to bring in more clarity with respect to the rights of investors in the event of resolution of the investee financial service providers. The bill will be a step in a right direction to improve investor confidence in the market.
Enforcement of Security Interest and Recovery of Debts Laws Amendment Bill, 2016
With rising NPAs, Indian Banks are in continuous stress. Slow pace of recovery of financial debts has constrained the financial position of the lenders raising concerns among the investors. Though establishment of Debt Recovery Tribunals (DRTs) and empowering of secured creditors have facilitated faster recovery of debts much more needs to be done. Hence, Parliament has passed Enforcement of Security Interest and Recovery of Debts Laws Amendment Bill, 2016. It seeks to strengthen the debt recovery laws, improve financial health of the banks and improve ease of doing business.
The Bill seeks to amend four laws: Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 Recovery of Debts due to Banks and Financial Institutions Act (RDDBFI), 1993 Depositories Act, 1996 and Indian Stamp Act, 1899.
Prominent changes made with respect to the DRTs:
- Strict time lines for filing of written statement and conclusion of hearings so as to expedite adjudication.
- Filing of recovery application, written documents in electronic format.
- Uniform procedure for carrying out proceedings.
Along with the bankruptcy law, amendments proposed in this bill will help to create an enabling infrastructure to effectively deal with non-performing assets (NPAs) in the banking system. The bill will help the financial institutions and banks to effectively recover their bad loans. Also, these measures would provide additional recovery avenues for the benefit of debenture holders.