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India’s bankruptcy regulator has tightened the disciplinary framework for insolvency professionals, instituting hefty penalties for violations as they steer distressed businesses through the resolution process.

Erring professionals will be fined up to 25% of the fee charged by them, an order from the Insolvency and Bankruptcy Board of India (IBBI) said on Wednesday.

The penalties start from a minimum of 50,000 or 1 lakh, depending on the breach, and go up to 2 lakh or 25% of the fee charged by the professional, whichever is higher.

IBBI is setting the benchmark for penalties so that individual insolvency professional agencies or self-regulators set up by bodies like the Institute of Chartered Accountants of India (ICAI), Institute of Cost Accountants of India, and Institute of Company Secretaries of India impose penalties in a uniform manner. These agencies enrol, educate, monitor and regulate insolvency professionals. Chartered accountants, cost accountants, company secretaries and lawyers are usually enrolled as insolvency professionals.

Experts said the IBBI move seeks to ensure insolvency professionals remain compliant with the letter and spirit of the Insolvency and Bankruptcy Code and conduct themselves ethically.

“Previously, the insolvency professional agencies were free to discipline their member resolution professionals by imposing discretionary penalties decided by each agency. This circular does away with this discretion, and requires all agencies to adopt a uniform pattern of penalties on their member resolution professionals for specified violations," said Charanya Lakshmikumaran, partner at law firm Lakshmikumaran and Sridharan Attorneys.

According to the IBBI order, the penalty is up to 1 lakh or 25% of the fee charged by the professional, whichever is higher in cases of failure in making proper disclosures to the insolvency professional agency. The minimum penalty, in this case, is 50,000. In cases where the professional accepts assignments that involve a conflict of interest with other stakeholders, the penalty is up to 2 lakh or a quarter of the fee charged, whichever is higher. In this case, the minimum penalty is 1 lakh. Earlier this month, the regulator prohibited professionals hired as administrators of distressed companies from continuing in that role if any of their colleagues from the same consultancy represent any other party in the same case.

The bankruptcy board has specified penalties for 14 specified breaches, including any violation of the charter of the insolvency professional agency. These agencies have to incorporate the same in their charter.

Insolvency professionals have to deal with several stakeholders with conflicting interests. These professionals hired by the majority lenders virtually run the distressed firm while a revival scheme is explored under the oversight of tribunals. Their job includes admission of claims from creditors, getting the company’s assets and liabilities valued, raising finances, hiring accountants and lawyers and inviting bids from fresh investors. Their decisions have an impact on the value realized by creditors.

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