India plans to suspend new bankruptcy filings for a year

New Delhi

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 on Sunday as part of her speech to revive economic activity. Also, the minimum threshold to initiate insolvency proceedings has been raised to 10 million rupees (S$188,300) 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 jewellers to developers.

The measures will help small business who were "reaching a stage of bankruptcy", Ms 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.

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"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 (Insolvency and Bankruptcy Code) will in no way address those issues."

Ms Sitharaman, in her fifth briefing in as many days on measures to support the economy, listed a package totalling about 21 trillion rupees to help businesses and individuals get back on their feet following a nationwide lockdown to contain Covid-19. The measures announced on Sunday also included:

On Saturday, Ms Sitharaman also announced that India will ease restrictions on the level of foreign ownership in defence manufacturing, in a move aimed at cutting down on imports. Under the plan, foreign investors would be able to own a stake of up to 74 per cent in defence manufacturing ventures, up from the 49 per cent limit now, Ms Sitharaman told a news conference.

The increase in foreign investments would help reduce a "huge defence import bill" and make India self-reliant in defence production, she said, adding India would also expand the list of weapons that could not be imported.

The move would give a major "incentive to foreign defence manufacturers who want to retain control" in the joint ventures, said Atul Pandey, a partner at India law firm Khaitan & Co which advises defence firms.

He said major defence manufacturers, such as Lockheed Martin Corp, Boeing, MBDA, Raytheon and Dassault, which all have joint ventures in India, could expand their investments, he said.

The government, facing a big drop in revenue collections amid the coronavirus crisis, has faced calls from policymakers to cut spending, including defence imports.

In February, the finance minister allocated 4.71 trillion rupees for defence in the annual budget for 2020/21, including about one trillion rupees for capital spending. BLOOMBERG, REUTERS