India is among those few countries that still lack clear bankruptcy laws. Unlike the West, India neither has any Chapter 11 nor does it have any similar provisions under which a corporation can file for bankruptcy. Yes, the government does takeover 'sick' private companies through the Board for Industrial and Financial Reconstruction (in conjunction with the Sick Industrial Companies Act, 1985). But the BIFR takeover is more like a death warrant and a Saturday "everything must go" shed sale than a hope for a restructured existence. And BIFR is purely to blame for such a pathetic situation.
Not only has BIFR failed in its duties to educate entrepreneurs and corporations about the various facilities it can offer, but it also has ensured that given its literally 'sickening' record of destroying companies taken over, not many loss making firms eventually even wish to apply to the BIFR for assistance. Worse, even for those companies that by hook, crook or palm greasing methods, get financial assistance from BIFR, the management of these sick companies is almost never taken to task.
Technically, any company that is five years old, has a factory license, 50 workers and where the accumulated loss is equal to or over its net worth can file for being classified a 'sick company' under BIFR. Today, BIFR has more than 5,500 companies registered as sick companies and has added 64 more companies in 2009 alone. Shamefully, BIFR itself does not have an updated list of 2010 cases on its website. A brief glance through even the till-2009 list of these companies will be enough to gauge that most of them are running in losses not because of skewed economic condition, but because of management indiscretions. Ironically, while pending loans and taxes are waived off and financial support provided through the tax payers' money, very rarely have the management of these so called 'sick' firms been pulled up. In most of the cases, the owners and promoters of these self-declared sick companies get away scot-free and are not even required to pay token penalty for mismanagement.
Without question, BIFR needs to re-craft their procedures. For instance, the owners seeking BIFR shelter to ward-off creditors and get their taxes waived-off must be taken through a due-diligence process through CAG-like agencies that absolves them of any wrongdoing. Additionally, along with BIFR laws, India needs its own version of Chapter 11, especially to give creditors a way to recover their dues and check any unnecessary and unwarranted filing.
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