At the request of the ministry of micro, small, medium and micro enterprises (MSME), the Federation of Indian Micro and Small and Medium Enterprises (FISME) has kick-started the process of developing a draft law on insolvency and bankruptcy for such enterprises.
Earlier this month it organised a meeting with economic and legal experts on insolvency. The meeting was attended by Sangeeta Saxena, an official of the ministry of MSME; Jiten Khosla of the Indian Institute of Corporate Affairs (IICA); Pallavi S Shroff, a partner in the legal firm Amarchand & Mangaldas & Suresh A Shroff & Co; economists Bibek Debroy and Laveesh Bhandari; Anil Bhardwaj, secretary-general of FISME and two others representing the federation.
The meeting agreed that since 97 per cent of Indian MSMEs were partnerships or proprietorships, issues arising out of business failure could only be addressed through a modern personal insolvency law and an affordable litigation process-cum-administrative mechanism.
It also agreed that the proposed law could draw from the US bankruptcy code for its effectiveness and simplicity, while the litigation process/administrative mechanism needed to be chosen from the UK or other European Union countries to prevent it from becoming too “advocate-driven” and out of reach of most MSMEs.
One of the key challenges in India will be the way these laws will be applied as the court system is extremely outdated and slow. The backlog of cases is very long and in absence of any prior experience of the judiciary to handle these kind of cases, applying bankruptcy law would be tough. Combined with rigid labor laws, incorrect financial reporting by a large no. of SMEs and lack of bankruptcy lawyers will be some of the major issues which the ministry needs to look if they want the laws to be implemented properly.
Otherwise it will another instance of well meaning laws being drafted which never get implemented properly.
