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NEW DELHI : The regulatory framework for professionals hired by lenders to run insolvent firms is getting tighter, which will make them more vigilant and ensure all legal requirements are complied with, said experts.

Two amendments on 4 July by the Insolvency and Bankruptcy Board of India (IBBI) will add more teeth to the regulatory oversight process, considering that the IBBI had already prescribed penalties for erring professionals last year. It will also bring in more transparency in the business relationships of resolution professionals with all stakeholders and streamline the disciplinary process, the experts said.

The IBBI has made it mandatory for an insolvency professional to disclose relationships with key stakeholders such as the corporate debtor, professionals appointed by the insolvency professional, financial creditors and the prospective investors within a specified timeframe.

‘Relationship’ is defined under various heads. Such as if an insolvency professional receives 5% or more of the annual gross revenue for professional services rendered to a related party where an insolvency professional is a partner or director of an insolvency professional entity; or if the person has any relation with a partner or director of a related party during the period of the transaction.

The amendments to insolvency professional regulations will make resolution professionals vigilant as it prescribes a separate disciplinary process, said Charanya Lakshimkumaran, partner, Lakshimkumaran and Sridharan Attorneys.

“It also imposes additional responsibility of disclosure of the professional’s relationship with stakeholders within prescribed times and, at the same time, it obligates the resolution professional to ensure the corporate debtor complies with applicable laws. The amendment also has a deterrent effect on the resolution professional as the penalty, if imposed for non-compliance, will not form part of the insolvency resolution cost but the same will have to be borne by the professional," she added.

The changes to the regulatory rules for such professionals ensures that they protect the interest of all stakeholders, and not just of the lenders.

Experts said the steps will make the bankruptcy resolution decisions more neutral and help reduce litigation.

According to Mehul Bheda, partner, Dhruva Advisors LLP, a consultancy, the amended regulations warranting disclosures about the relationship with stakeholders will enhance impartiality in the bankruptcy resolution process.

“The amendment is done with the aim to enhance transparency and impartiality on the part of the resolution professional in the resolution process. This will enhance confidence and ensure only credible resolution professionals participate, thus giving a much needed boost to the insolvency resolution process in India," he said.

As part of the penal provisions, IBBI had said that erring professionals will be fined up to 25% of their fees, and also mandated prompt recovery of the penalties.

The developments are significant considering that insolvency professionals play an important role in assessing the assets and liabilities of companies undergoing bankruptcy proceedings, besides determining the admission of claims by various parties and inviting fresh investors.

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