Impact of the repealed Article 370 on IBC : The curious case of rising NPAs

 

Author: Sarthak Ohri.

Date: August 6, 2019.

Ever since I started studying the Indian commercial legislations as part of my course in university, I always used to wonder why the state of Jammu and Kashmir was excluded from most of them. 

Section 1 of many such statutes had the text written as " It extends to the whole of India, except the State of Jammu and Kashmir."

Too immature to understand the reason I kept thinking that maybe the people of J&k are too supreme to be guided by such laws. I still remember my occasional childhood trips to the state, only a few kilometres away from my home.

But yesterday on 5th August 2019 we all saw an order of the president that has been passed in the upper house of Indian Parliament, namely Rajya Sabha. This order is called 'THE CONSTITUTION (APPLICATION TO JAMMU AND KASHMIR) ORDER, 2019'. replacing earlier order of 1954. As per this order, all the provisions of the constitutions shall apply to the state of Jammu and Kashmir.

Another important bill that has been passed by the Rajya Sabha yesterday is the Jammu and Kashmir (Reorganization) Bill, 2019. As per this bill, the state will be divided into two Union Territories, namely, Jammu and Kashmir and the other being Ladakh.

As per Article 1(3) of the Indian Constitution, Union Territories shall form part of the Union of India. Therefore, applying the above provisions all the applicability of all the legislations enacted up till today shall automatically stand extended to such union territories.

The Insolvency Connection

India passed it's Insolvency and Bankruptcy Code, 2016 (IBC) in the year 2016. As per section 1 of the code, it extends to the whole of India except the Part III of the Code which shall not extend to the State of Jammu and Kashmir.

Part III of the code deals with the insolvency resolution and bankruptcy for individuals and partnership firms. Part III is yet to be notified by the Government, but it is expected anytime in a year or two.

Earlier the Part III did not apply to the state of Jammu and Kashmir, but after the above-mentioned order of the President of India gets passed in both the houses, the same shall apply to the state.

How does that impact NPAs

The state of Jammu and Kashmir is currently facing a huge NPA problem. The NPAs stands above 5,500 Crores of which major debt has been lent by Jammu and Kashmir Bank (A state-run bank).  As per official data, Total exposure of J&K Bank is much more than this figure mentioned above of which 80% belongs to the Kashmir region.

A major part of the above-mentioned debt has been taken by small non-corporate industries and Individuals for personal and housing loans. MSMEs forms a major chunk of the state's industry which were set up in the state-run industrial areas on account of income tax exemption. Most of the MSMEs is registered as partnership firms or cater under a proprietor.

While the provisions of Part III of the IBC has not been notified as of today, I am very sure that whenever it gets notified, it will have a significant impact on the stressed assets in the state. 

Hence this change in law has placed another feather in the cap which would go unnoticed if the state had not been re-organized.

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References :

1.J&K Bank Annual Reports of 2017-18 and 2018-19.

Disclaimer: All views expressed on this page are the author's own as part of his research and do not represent the opinion of any entity with which the author is, or have been associated.