The ongoing farmers’ protest against three newly enacted laws appears to have made the government cautious in making changes to the Insolvency and Bankruptcy Code (IBC).

The government has changed its plan to quickly roll out two separate schemes—one for out-of-court preparation of corporate rescue deals and, the other, a special regime for small businesses—in the light of unexpected farm protests, a person familiar with the development said, adding these will be incorporated into a major revision of the IBC likely later in the year.

Reality check

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Reality check

The move reflects greater insistence at all levels in the government for extreme caution while legislating changes affecting key sections of the economy. Small businesses, for example, contribute over 28% of the gross domestic product (GDP), 45% to the manufacturing output and more than 40% of exports, according to official estimates.

No formal response to an email sent to a spokesperson for the corporate affairs ministry was available at the time of publishing.

The farmers’ protest has shown that even reform ideas debated in public can upset stakeholders once they become law.

After further consultations, the government will bring an amendment to IBC either in the monsoon or in the winter session of Parliament, which will have elements of a pre-pack (out-of-court) insolvency resolution scheme and a scheme for MSMEs. Even certain aspects of these schemes, where the government had earlier taken a view, are being reviewed on the basis of fresh feedback, the person cited above said on condition of anonymity.

The pre-pack scheme entails creditors and investors drafting a rescue package outside courts to save time and seeking the judiciary’s blessings for the final plan. In the case of a proposed simpler regime for MSMEs, the idea is to adapt the regime for companies to suit the informal nature of small businesses. One key consideration would be to let the defaulting small business retain operational control, unlike in the case of a bankrupt company, which is run by an administrator. Small businesses are usually proprietorships or partnerships.

“Legislative changes have to be made with care, caution and consultation,” the person said, explaining that further changes cannot be made in a hurry.

Sumant Batra, managing partner of law firm Kesar Dass B. and Associates, said the current proposals for a pre-pack scheme needs further deliberations with stakeholders before it is taken to Parliament.

One factor that encouraged the government not to make IBC amendments in haste is the fact that already, the payment default threshold for creditors to take bankruptcy action against companies has been raised from 1 lakh to 1 crore. This will protect MSMEs from the threat of being dragged to tribunals once the current IBC suspension expires on 24 March, said a second person who also spoke on condition of anonymity.

Batra said that since many companies have been pushed into liquidation in the last four years, there is a need for policy attention to make liquidation speedier and efficient. “Besides, the concept of mediation and conciliation should be considered for incorporation in the IBC architecture as the sophisticated economies have already made much progress in this area,” said Batra.

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