‘Biz stakeholders must think of collective good’
NEW DELHI: Stakeholders of bankrupt businesses should take decisions based on what is optimal for the entire bankruptcy resolution ecosystem, rather than what is good for them individually, chief economic adviser (CEA) Krishnamurthy Subramanian said on Friday.
The Insolvency and Bankruptcy Code (IBC) or any other system can be caught in an inefficient equilibrium when individual stakeholders take decisions based on what is optimal for them rather than the society, Subramanian said at a conference on ‘Five Years of Insolvency and Bankruptcy Code and the Way Forward’.
Subramanian invoked the concept of ‘dharma’ or the right course of action and suggested that decisions taken with the overall good in mind could improve the outcome of IBC, one of the most important reforms by the government led by Prime Minister Narendra Modi in its previous term in office.
The CEA’s comments about collective good as a guiding principle for decision-making relating to bankrupt businesses comes in the context of the high degree of haircuts taken by lenders in the case of some bankrupt firms.
The parliamentary standing committee on finance chaired by Bharatiya Janata Party leader Jayant Sinha had earlier this month expressed concern over this trend and suggested a code of conduct for the panel of lenders who control the affairs of a company going through bankruptcy proceedings.
Professionalism is lacking at the levels of insolvency professionals, lenders and in other areas, Justice (retd) M.M. Kumar, former chief justice of Jammu and Kashmir high court, a member of the National Human Rights Commission and former president of the National Company Law Tribunal, said at the conference organized by the Confederation of Indian Industry.
There has to be some rethinking on revitalizing those areas and instilling professionalism, Justice Kumar said. “I think that a pre-pack scheme (an informal bankruptcy resolution system offered to small businesses) may have to be universalized,” he said.
The industry has also been asking for the expansion of the scope of this scheme for larger businesses.
Commenting on his early research of the bankruptcy laws in the US, Subramanian noted that the move away from feudalism is a hard-fought battle as the earlier system enabled those in the status quo to continue benefitting from it. “And therefore that ground had to be slowly but surely taken away,” Subramanian remarked.
Commenting on sub-optimal equilibrium in the context of IBC mechanism, Subramanian said, “Systems, whether it’s IBC or other systems can be caught in inefficient equilibria when each agent justifies his or her suboptimal actions, by saying that other entities are actually behaving sub optimally, and therefore, I am behaving sub optimally.”
The Insolvency and Bankruptcy Code, 2016 was introduced in May 2016 to resolve claims involving insolvent firms.