05 February 2013

Indian "Restructuring" Not The Solution

Here's a link to an article in today's Indian Express about the surge in Indian corporations seeking "Corporate Debt Restructuring." Restructuring is not always a bad idea but the lack of a meaningful insolvency/bankruptcy regime in India means that corporations that have no business staying in business (at least under the same incompetent management) linger on and on and on. This diverts assets from productive to continuing nonproductive uses, and preserves value for shareholders that should have been eliminated in favor of the corporation's residual "owners," its creditors.

I've previously posted about this problem here, here, and here. India's failure to come to grips with the need for meaningful corporate reorganization stems from its first 45+ years of existence as a socialist state. Like China today, most substantial corporations in the early years of India's independence were government-owned. Thus, liquidation and even reorganization of state enterprises were inconceivable. Since the liberalization of India's economy in the early 1990s, India's private sector has grown dramatically but an attitude in favor of continued corporate zombie-like existence persists. Continuing restructuring burdens both corporate and banking sector productivity and should be replaced with a meaningful and transparent system of corporate insolvency.

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