The bill sets a deadline of six months within which corporates will have to settle dues with banks and other lenders.
Lawmakers on Thursday took the first step in passing a new bankruptcy law that will make it easier for financial institutions and banks to deal with bad debts arising out of failed corporate ventures.
"This legislation is a transformational building block that will change our economy," said Jayant Sinha, the junior minister for Finance, replying to the debate on the issue in the lower House of Parliament, the Lok Sabha.
The bill sets a deadline of six months within which corporates will have to settle dues with banks and other lenders. If the promoter of a company wants to exit a loss-making business, it can be done by paying the employees two year's salary as compensation.
"If this bill is passed by both Houses of Parliament before May 31, then our ranking in the World Bank report on the ease of doing business will go up," said Sushmita Deb of the Congress party that is often opposed to most of Modi government's economic policies.
The bill comes at a time when the country's political discourse is centred around how the banking system in India displays brazen double standard.
Unable to repay bank loans because of crop failure, thousands of farmers in rural India have committed suicide. The other side of the story is represented by the flamboyant liquor baron Vijay Mallya, who owe Indian banks over Rs 9000 crore that he had taken as loan to run his now failed airline, Kingfisher.
Multiply such stories and you get a sense of the bad debts in the Indian banking sector. One estimate puts this figure at Rs 1.14 lakh crores. "The owner of Kingfisher hasn't cheated banks of one or two crore. He has defrauded banks of 9,000 crores while employees were forced to come on the streets. He is a big cheat," said Anand Rao Adsul, a Shiv Sena member and an ally of the government.
Before Indian authorities could issue an arrest warrant against Mr Mallya, he left for London where he is currently believed to be staying. But the episode has created another problem, one that was echoed by Jayadev Gala of Telugu Desam Party of Andhra Pradesh. "Most banks after the Kingfisher default don't give any loans without personal guarantee. I am just wondering when will we have a promoter like Elon Musk who created Tesla Motors if he were to give personal guarantees."