Most ordinary mortals wonder why in our country businesses go bankrupt but the promoters are never broke?
Why is it that the small shareholders suffer for business errors of top management?
When business entities go bankrupt, they sink with the common man’s entire kitty of hard earned money. It is the small investor or shareholder who goes bankrupt, the management comes out unscathed from the financial disaster.
If we take the dictionary meaning, then bankruptcy may be defined as a legal procedure when the debtor is unable to make his payments. But in effect, it is the procedure to extract maximum value from a failed venture.
In our country, the failed venture has been used as a business opportunity and there have been instances where people have used weak insolvency laws as a path to brighter future. In fact, bankruptcy has been used as a business tool to conceal assets, destroy documents, make false claims and declarations and tilt the law in the unsuccessful entity’s favour.
The most commonly used route for bankruptcy frauds is done by floating Initial Public Offerings (IPOs), not investing much themselves, collecting money from the small investors and then showing huge losses in the name of cost overrun, fierce competition or order cancellations etc.
In many cases the same group starts afresh using a new name with different promoters and move to different cities to escape the law and thereby manage to avail finances for the new venture.
Taking a closer look one realises that it takes somewhere around 10 years to wind up a business in India.
Add to this, the revelation from an IFC report that states that out of each dollar invested in business in India, only 10 cents are recovered after waiting for all those years.
Therefore, one must understand that bankruptcy or insolvency laws are critical to the smooth working of an economy.
Whether it is a boom or a bust, the lenders should have the satisfaction that they can get their money back and how well an economy is able to achieve this decides the investor confidence in the system.
It is surprising that as one of the largest recipients of FDI in the world, we do not have very clear-cut bankruptcy law which acts as a roadblock to inflow of FDI. The JJ Irani Committee has clearly noted that “the Indian system provides neither an opportunity for speedy and effective rehabilitation nor an efficient exit.”
Even as the Companies Bill 2009 was introduced in Lok Sabha on August 3, 2009 with revised framework for insolvency, experts are sceptical that the law may not be passed for another couple of years. Of course, the small investors are not the important corporates who keep the wheel of business moving and the policymakers can always take their own sweet time to form significant bankruptcy law.
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