End of the BIFR era

THE UNION CABINET's decision to repeal the Sick Industrial Companies (Special Provisions) Act of 1985 ends the unsuccessful 15-year experiment with the Board for Industrial Finance and Reconstruction (BIFR), but no sooner have plans for its replacement been announced that criticism has emerged from at least one chamber of commerce about one important aspect of the new system that will oversee the winding up of insolvent companies. By any standard the BIFR, on which high hopes had been placed both for rehabilitation of potentially viable companies and an orderly winding up of chronically sick companies, failed to measure up to its task. One reason certainly was that the qualifying criterion for examination by the BIFR, the erosion of the net worth of a company, meant that companies went before the Board well past the stage in which there was hope for revival. However, another reason for the failure of the BIFR was one inflicted on it by successive Governments - the Board was never fully staffed to the extent required to handle the steady stream of cases.

The proposed legislation, to be introduced in Parliament before the end of the monsoon session, takes a larger and integrated view of the problem of industrial sickness and commercial insolvency. After the necessary legislation is enacted, the National Company Law Tribunal will be established to oversee revival, amalgamation and winding up of sick companies. The second important component of the new scheme of things is that as against the open-ended nature of the BIFR proceedings, winding up operations will now have to be completed within 24 months. The third feature is that the criterion for sickness will be made tighter, making it more likely that a failing company can be revived. While all these features are significant changes from the past, it is the proposal for funding of a revolving fund to aid rehabilitation and pay workers' dues in sick companies that has attracted criticism. The scheme for levy of a small cess on companies' annual turnover, rising from a minuscule 0.005 per cent to 0.1 per cent, has been described as a case of efficient companies subsidising the inefficient. This amounts to caricaturising the proposal since the general principle underlying taxation is that every citizen or institution enjoys the services provided by the Government from revenue collected from whoever pays a tax or cess. The principle governing the levy and use of the cess for the revolving fund is no different. In any market, today's profitable companies can potentially turn sick tomorrow, so every firm should have an interest in contributing what is really a token amount. The more relevant question is whether the Rs. 75 crores expected to be collected at the minimum from this cess every year will be sufficient for the stated purpose.

The provision for filing of bankruptcy and winding up of insolvent companies should be available in any modern economy. The interests of neither the company nor the workers are served by keeping an enterprise closed but not liquidated. Yet, the Indian situation poses unique challenges since a good proportion of the loans to commercial enterprises come from publicly-owned banks and financial institutions, and in a substantial number of cases companies fail not because of poor commercial decision- making but because the owners or managements run them to ground by asset-stripping and financial misappropriation. The question is whether the normal practices for dealing with commercial bankruptcy apply in cases where the theft of public funds is involved. The issue is admittedly complex and cannot be easily dealt with. But if the present system makes it as difficult as possible to wind up an unviable company, the new one contains the danger of facilitating easy liquidation and, with that, permitting the deliberate milching of companies to go unchecked.

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