Home / Opinion / Views /  The case for a sectoral approach to insolvency resolution in India

India’s Insolvency and Bankruptcy Code (IBC) was designed as a sector-agnostic law, and it was enacted with the aim that it will help companies resolve their stress in a timely manner. Since the Code provides for both substantive as well as procedural aspects of insolvency, it is worth considering if the insolvency resolution framework needs to be uniform for all sectors.

A study of cases in India has found that all sectors have resolution delays, with the wholesale and retail trade sectors taking 236 days to get approvals for a resolution plan, construction sector taking 279 days and electricity and other sectors taking approximately 197 days. The same study suggested that a corporate debtor from the service industry is subject to more delays as compared to the non-service/manufacturing industry. Thus, the timelines provided for under the Code may not suit all the sectors well.

New proposals to amend the IBC seek a special mechanism for the real estate sector, whereby separate projects can be dealt with separately. However, there has been a growing consensus among experts that India, like the UK, needs separate insolvency processes for several other industries, such as power utilities. A separate process for core/critical sectors, it is argued, would enhance value maximization and the protection of corporate debtors.

The country’s current IBC is not suited for all sectors. This is for two reasons. First, its general provisions need not suit each sector because some can be counterproductive to value maximization. Second, certain sectors are highly globalized, such as aviation, finance, etc, and have an international framework that India should aim to harmonize national law with, which would also require sector specificity.

Take, for example, the banking sector in India. The IBC does not suit financial service providers, which are authorized or registered by the Reserve Bank of India (RBI), Securities and Exchange Board of India or Insurance Regulatory and Development Authority, as these service providers include banks, financial Institutions, non-banking financial companies and insurance firms. The regulatory framework for such institutions must deal not only with the ex-ante problem of how to prevent their failure, but also with those that are failing or headed towards failure.

Next, consider India’s energy sector. The 40th Standing Committee Report on Energy presented in the Lok Sabha in August 2018 addressed RBI’s Revised Framework, which introduced a new harmonized and simplified generic procedure for the resolution of stressed assets in the energy sector. It advocated a sector-specific approach for energy on account of its peculiarities as a field.

The telecom sector is yet another field that has had insolvency proceedings and it has been found that the treatment of dues here cannot take the same approach as in other sectors. The National Company Law Appellate Tribunal (NCLAT) ruled in a case that supplier telecom spectrum can be sold under the insolvency process, but only after government dues are cleared. This dealt a blow to the bankruptcy proceedings of defunct telecom firms such as Aircel and Reliance Communications. In the UK, after privatization in the early 1980s, the telecom sector has included non-state suppliers that would be subject to ordinary insolvency proceedings in the event of their going insolvent.

The aviation sector is yet another sector not suited for the IBC. Airline insolvencies differ from insolvencies of companies in other business sectors. The financing arrangements for the manufacture and purchase of aircraft, and associated ownership and leasing arrangements, are usually complex and often vary considerably from case-to-case. Not to forget that this sector is heavily regulated globally and the regulations to which airlines are subject can impose limitations on the manner in which they operate and the ease with which enforcement action can be taken.

Insolvency proceedings commonly focus only on the interests of creditors, which gives rise to tension if operations must carry on in the interest of customers. In general, the risk of insolvencies that can have wide public impact has risen, given our growing dependence on non-state companies as a result of privatization and also the growth of non-state players in the digital services industry. This should prompt consideration of whether a more nuanced approach to insolvency is required if there is a larger public interest involved.

Since India is proposing to revamp its insolvency framework and the experience of past six years with the IBC shows that the latter has not really proven to be sector-agnostic, it would be worth considering an approach that addresses sectoral challenges and helps harmonize internal conflicts of stakeholders and international best practises in every sector.

In the amendments that the Indian government is currently considering to the Code, the main emphasis seems to be on ensuring that the country’s law catches up with various challenges that emanate from market dynamics that had not been predicted but have been identified in the past half-decade plus of its operation.

Frequent changes in policy are never ideal. What’s required is a law that’s drafted well enough to suit changing times without the need for tweaks every now and then. This assures stakeholders a sense of stability. In conclusion, we need to reimagine the basic design of the country’s insolvency framework. Unless this is done, amendments to the IBC that address symptoms will not be able to cure the disease.

Neeti Shikha & Rebecca Parry are, respectively, a lecturer at the University of Bradford and a professor of law at the Nottingham Trent University, UK.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Recommended For You
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout