India plans to enact a cross-border insolvency law and take steps to make bankruptcies of individuals easier as part of reforms aimed at speeding up the resolution of stressed assets, according to the government’s Economic Survey for 2018-19.
The cross-border insolvency law will not only provide a transparent and predictable mechanism to deal with issues involving investors, banks and companies in more than one country but also push up foreign investment into India, the survey said.
The survey, tabled in parliament by finance minister Nirmala Sitharaman, said the law will address the key tenets of cross-border insolvency – access, recognition, relief and cooperation— by providing a comprehensive legislative and regulatory framework.
The survey said that India has initiated steps to adopt the UNCITRAL Model Law on Cross-Border Insolvency, the most widely accepted blueprint to effectively deal with cross-border insolvency issues while ensuring the least intrusion into each country’s internal insolvency and bankruptcy laws. A draft Bill has been placed in the public domain for discussion, it said.
In another step aimed at fine-tuning the Insolvency and Bankruptcy Code, which was enacted in 2016 to ease banks’ $150-billion pile of bad loans, the survey pointed out that the government was working on a framework to deal with insolvency of group companies.
The Insolvency and Bankruptcy Board of India has set up a working group under former SEBI Chairman UK Sinha to recommend a regulatory framework to facilitate insolvency resolution and liquidation of debtors in a corporate group, the survey said.
Presently, the insolvency of different companies of the same group is dealt with separately. “A coherent approach can address information asymmetry, provide coordination and prevent delay and clogging up of insolvency infrastructure,” the survey said.
Individual insolvency
The survey observed that implementing the insolvency law for individuals and partnership firms poses distinct challenges.
The bankruptcy law provides three classes of individuals—individuals who have executed personal guarantees for corporate debtors; individuals who are engaged in economic activities through proprietorship and partnership firms; and other individuals.
In order to deal with complexities in individual insolvencies, the government has set up a working group led by former law secretary PK Malhotra to recommend a strategy for implementing the IBC to deal with such cases.
Mediation and counselling are practices prevalent in most developed countries to deal with individuals, the survey said, adding that the group is considering measures to provide easier access and reduce the time and cost of insolvency proceedings for individuals.
IBC progress
The survey also highlighted the progress of the IBC since it came into operation and how it has helped creditors. Until March 31, 2019, financial creditors had settled claims worth Rs 1.73 trillion through 94 insolvency cases.
Further, citing data from the Reserve Bank of India, the survey said that banks have received Rs 50,000 crore from previously non-performing accounts and that an equal additional amount has been “upgraded” from non-standard to standard assets.
The IBC has helped improved the performance of the banking system as bad-loan ratios declined and credit growth accelerated. The gross non-performing assets ratio of commercial banks decreased from 11.5% in March 2018 to 10.1% in December 2018.
The measures taken to reduce the twin balance sheet problem—banks’ bad loans and highly indebted companies—and the bankruptcy law have led to an improvement in the investment climate within the economy, the survey said.
“The ecosystem for insolvency and bankruptcy is getting systematically built out. It has already led to recovery and resolution of significant amount of distressed assets as well as palpably improved business culture,” it added.
