There are 27 tribunals are being overseen by 29 judges around the country, which are at least 25 judges short of what is required. Many people have no prior financial experience. M.B. Gosavi, a single judge, sits on four benches. Cases from Noida, a Delhi suburb where large builders have defaulted on purchasers, are heard by a single tribunal member located 300 miles away. Under the Companies Act, the insolvency courts also hear unrelated cases, further taxing an already overburdened system.
There are numerous delays, not only in sanctioning a sale or liquidation in 270 days, as the law originally proposed (the time limit was later expanded to 330 days), but also in accepting cases to begin the clock. Since November 2018, Punjab National Bank has been attempting in vain to bankrupt Indian Steel Corp. A year ago, KKR & Co.'s India unit filed a lawsuit against Sintex-BAPL Ltd. However, an operating creditor filed its own petition against the car parts manufacturer, which was eventually negotiated, and the company was able to emerge from bankruptcy. Only last month was KKR's application accepted. Leaving aside the top nine bankruptcies ordered by the central bank in 2017, creditors have only recovered 24% of their losses.
The current business environment is a colonial heritage. With very little cash, a handful of British managing agencies used to have control over enormous swaths of productive assets. The agencies were outlawed in 1969 after becoming controlled by Indian business dynasties, but a strongly state-dominated banking system still allows politically connected borrowers to construct empires on a fraction of loss-absorbing equity. When government-owned banks lose money, taxpayers are on the hook to make up the difference.
When parliament passed the bankruptcy law, it was well aware of the power imbalance and perverse incentives. As a result, legislators crammed it with creditor-friendly measures. But there was always going to be backlash. Politicians who must compete in expensive elections funded by corporate funding have simply lost their courage to be harsh. Urjit Patel, the previous governor of the central bank, tried and failed to make large borrowers more accountable by eliminating banks' evergreening of troubled loans.
It is yet possible to turn the bankruptcy regime into a functioning institution. It's possible that it won't happen until the government is no longer a prominent role in the lending sector. Even if banks are not privatized, procedural flaws can be rectified relatively easily if governments desire to avoid capital misallocation. Maybe they don't. Isomorphic mimicry, as noticed by economist Lant Pritchett and others, is a fantastic approach for assuring chronic, successful failure.