The code is transformational and would help India improve its 130th ranking in a World Bank survey on the ease of doing business
The Lok Sabha on Thursday backed a new bankruptcy code, a crucial step towards establishing a debt resolution regime to strengthen the hands of banks seeking to recover $120 billion in troubled loans.
The Insolvency and Bankruptcy Code 2016, passed by a voice vote, is expected to be approved by the Rajya Sabha next week as the main opposition Congress party has pledged its support.
The government will repeal an ineffectual, century-old insolvency law and amend 11 laws now dealing with defaulters.
Junior Finance Minister Jayant Sinha told lawmakers the code was "transformational" and would help India improve its 130th ranking in a World Bank survey on the ease of doing business.
The World Bank estimates that winding up an ailing company in India typically takes four years, or twice as long as in China, with an average recovery of 25.7 cents on the dollar, one of the worst among emerging markets.
Once adopted, the code would aim to hasten debt recoveries and restructurings by setting a deadline of 180 days to decide the fate of a company that defaults.
If 75 per cent of creditors agree on a revival plan, that term can be extended by 90 days. Otherwise, a firm would be automatically liquidated.
A debtor could be jailed for up to five years for concealing property or defrauding creditors under the new law. Bankrupt individuals would be barred from contesting elections.
Analysts say the reform may take time to become effective, as India would need to train a new professional class of insolvency practitioner and compile comprehensive debt records.
"Two things - resolution professionals and information utilities - need to be focused on," said K V Karthik, a forensic and financial advisory partner at Deloitte India.
"These two are critical cogs in the wheel and the success of this legislation will lie in its implementation."