India won’t allow most companies to be tipped into bankruptcy for a year as authorities try to contain the economic fallout of the coronavirus outbreak.
Finance Minister Nirmala Sitharaman announced the plan Sunday as part of her speech to revive economic activity. Also, the minimum threshold to initiate insolvency proceedings have been raised to 10 million rupees ($132,000) from 100,000 rupees previously, and will largely insulate small businesses, she said.
The move risks delaying the clean up of the world’s worst stressed-loan ratio as creditors will be forced into lengthy debt resolution negotiations outside the bankruptcy framework. It may also slow fresh credit that’s vital to reverse the course of an economy set for a rare contraction as the pandemic stalls economic activity at jewelers to developers.
The measures will help small business who were “reaching a stage of bankruptcy,” Sitharaman told reporters in New Delhi. “All this had been kept in mind when we are addressing the issues.”
Bankruptcies in India are expected to climb as the coronavirus outbreak hits distressed companies harder in Asia’s third-largest economy. India has been under a strict lockdown since March 25 with some easing on April 20 and then May 4.
“It will ultimately hamper the recovery prospects of financial institutions in cases of existing defaults,” said Sumant Batra, who heads the insolvency and corporate advisory practice at law firm Kesar Dass B. & Associates. “The economic package is believed to provide assistance and incentives to sectors in order to recover from the economic slump, these proposed amendments to IBC will in no way address those issues.”
Sitharaman, in her fifth briefing in as many days on measures to support the economy, listed a package totaling about 21 trillion rupees ($277 billion) to help businesses and individuals get back on their feet following a nationwide lockdown to contain Covid-19.