Tadpoles to Thunder Lizards

September 5, 2016

Onno Ruhl, World Bank India Country Director and Uttamchandani, Global Lead for Credit Infrastructure, World Bank Group The Economic Times

In a seminal 2015 article on the culture of entrepreneurship in Silicon Valley, Newsweek highlighted the rarity of enormously successful tech startups — unicorns — that were valued at over $1billion.

It likened the chances of creating a unicorn to those of a frog laying 20,000 eggs to produce a few viable tadpoles, and went on to describe these extremely rare, but highly successful, startups as ‘thunder lizards’. It said that what’s missing from most conversations about unicorns and thunder lizards is the importance of failure. Both thrive in Silicon Valley not because failure is not an option but because failure can take place quickly and cheaply due to a bankruptcy culture that actually stimulates and promotes entrepreneurship.

How is it, then, that in another tech hotspot, it has been so difficult for so long to fail? For years, India’s insolvency and bankruptcy laws have discouraged failure. They have neither been able to successfully rehabilitate companies nor liquidate failed ones for the benefit of creditors. Successive Indian commissions — from the Irani Commission to the Rajan Commission — have documented India’s inability to deal effectively with business distress. In 2015, India was ranked 136 out of 189 countries in its ability to resolve insolvency cases by the World Bank’s Doing Business 2016 report.

The report noted that in India, the insolvency process usually takes over four years to complete, and returns about 25% to stakeholders. Fortunately, all this is now a matter of the past. For, seemingly in a flash, the Indian government has moved towards creating a more entrepreneurial, risk-taking culture — akin to the proverbial culture of Silicon Valley. Starting out in August 2014, the government constituted a Bankruptcy Law Reforms Committee (BLRC) that, in a short span of just seven months, produced a major report that was remarkable in its willingness to draw upon the multitude of reports that had gone before it.

Law Finds its Long Legs

Less than 10 months later, a draft law was produced and, eight months after that, the Insolvency and Bankruptcy Code 2016 (IBC) was enacted into law in India. Even a casual observer of the Indian legislative process will agree that this entire process — from concept to law — has taken place at lightning speed. The IBC aims to, among other things, improve the speed at which insolvency cases are resolved, as well as increase recoveries for stakeholders.

Both these issues were identified by the Doing Business report as major flaws in the earlier system. Nonetheless, after such a promising start down the path of reform, the government is now faced with the challenge of implementing this ambitious new law successfully. Operationalising the IBC will require at least three major government initiatives, all of which must be done quickly but carefully. First, the rules and regulations that are envisioned under the act must be drawn up.

This is the fine print that breathes life into the broad architecture of the act and takes many of its major components from idea to execution. Second, the adjudicative body envisioned under the IBC — the National Company Law Tribunal — needs to not only become operational, but its members also need to be trained in the unique characteristics of bankruptcy cases.

These cases involve complex financial arrangements and must move through their various stages at the ambitious speed prescribed under the IBC. Third, and perhaps most important, the ambitious regulatory scheme for insolvency practitioners — the private sector actors who implement the most critical aspects of the law must be operationalised through standards, codes of conduct and the creation of the insolvency board. Experience from other countries shows that these follow-up steps will be critical for infusing more predictability, confidence and transparency into India’s financial markets. The system will also need to address the concerns being expressed by the business community, such as the law’s inability to deal efficiently with international insolvencies and the failure corporate groups.

Harnessing the Spark

Moreover, some of the IBC’s more innovative features — like the mandatory waiting period before a failed company can put itself into liquidation — may need to be reviewed, as they can impede the speed of the insolvency process and thwart the very aim of the exercise. Harnessing the Spark In sum, though, the remarkably swift passage of the IBC indicates India’s fresh new mindset towards finance, entrepreneurship and risk-taking. It springs from the understanding that the inability to pay is not invariably a result of fraud that needs to be punished, but rather is an inherent part of a thriving, dynamic economy where even the tiniest tadpole has the chance to transform into that elusive creature: the much sought-after thunder lizard.

This opinion piece was originally published in The Economic Times on 3rd September, 2016.