Bankruptcy reforms: It is not dejure ranking but defacto outcome that matters..

Insightful post by Rajeshwari Sengupta. She analyses the recent bankruptcy code released by the Finance Ministry. She figures how the code will lead to a jump in Doing Business Rankings. So there will be a dejure increase but what matters is the defacto outcome. At the end of the day, businesses should see the benefits not just the media:

Many times, in economic measurement, we are able to observe the de jure status, but what really matters is the de facto outcome. This distinction is an important one when using the World Bank’s `Doing Business’ scoring.

On a de jure basis, the draft bill will improve India’s score in the ease of `Resolving Insolvency’ parameter, and there may be some merit in this as a first step. However, while we would like to have an improved `Doing Business’ score, we in India should primarily focus on de factooutcomes about recovery rates, and not be satisfied with de jureimprovements alone. If the latter were the sole objective, cosmetic changes to the Companies Act 2013 is all that is required.

In a recent paper, Hallward-Driemeier and Pritchett, 2015 show that there is practically no correlation between the findings recorded in the `Doing Business’ report and the ground realities of doing business. This derives from the large gaps that often exist between laws and regulations on paper, and the manner in which these are enforced in reality, especially true of developing countries.

For instance, one of questions asked in the World Bank questionnaire is: Does the insolvency framework allow a creditor to file for insolvency of the debtor? While the answer to this would be `Yes’ if the draft bill proposed by BLRC is enacted, in reality the filing process might be too cumbersome in the absence of good enabling infrastructure. This, in turn, would affect the timeliness of resolution and might also distort incentives for creditors to trigger insolvency proceedings to begin with. But these issues are ignored owing to the way in which the question is designed.

Focusing on improving India’s ranking in the ease of doing business report is thus problematic. There is a danger of engaging in `isomorphic mimicry’ where the reform process gains legitimacy by adopting `international best practices’ in the drafting of the bill without actually obtain the desired outcome. We need to devote energy and resources to a full implementation plan that involves perfecting the law, creating good institutions and building adequate State capacity. The outcomes that matter are recovery rates, equal treatment of unsecured creditors, treatment of bond holders, etc. — not the Doing Business ranking.

Least attention is paid to defacto..For the noise just dejure matters…


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