The time is ripe to enact a formal comprehensive cross border insolvency framework, especially when Indian businesses are expanding operations across countries and with increasing financial market linkages, the recently appointed IBBI Chairman Ravi Mital has said. 

Writing in IBBI’s quarterly newsletter for October-December 2021 – his first write up after assuming charge as the Chairman of Insolvency and Bankruptcy Board of India (IBBI) last month, Mital said that the proposed framework will build capacities, empower insolvency professionals (IPs) as well as creditors to access assets outside India.

It will also help trace avoidance transactions having cross-border implications and achieve the core objective of value maximisation as envisioned by the Insolvency and Bankruptcy Code (IBC).

“With a rapidly transforming economy, comes the need for rapidly transforming institutions that support its growth. Once enacted, the cross-border framework will provide a robust, principle based framework that Indian and foreign stakeholders can invoke to resolve cross-border insolvency situations swiftly in a more efficient manner,” Mital noted. 

Going global

He also highlighted that India’s financial sector is also increasingly interconnected globally with banks of Indian-origin holding cross-border positions of $168.4 billion in claims and $288.1 billion in liabilities by the end of March 2021.

The views of new IBBI chief’s are significant as India has been looking to enact a comprehensive cross-border insolvency framework over the last four years.

Now, India is on the verge of finalising this framework that could be introduced through a Bill in the Parliament for its enactment. The Corporate Affairs Ministry has already received public comments on the proposed legal framework for cross-border insolvency under the IBC.

In today’s inter-connected world, the real risk of failure is no longer restricted to a single economy. It is here that a comprehensive legal framework on cross-border insolvency could help to deal with cross-border risks, which hampers prospective businesses and investments. 

Proposed law

The new comprehensive framework is likely to be largely patterned on the UNCITRAL model law on cross-border insolvency, which has been adopted by the US, the UK, Japan and Singapore. The UN Model law is now proposed to be tweaked to suit the Indian context and requirements. 

Mital noted in the IBBI newsletter that adoption of cross-border insolvency regime will further India’s image as most improved jurisdiction in terms of insolvency resolution.

It will be viewed as a progressive and forward looking market reform by global investors and advanced jurisdictions. The proposed framework will govern all applications seeking recognition of foreign insolvency proceedings as well as applications from foreign jurisdictions seeking cooperation in Indian proceedings.

Through a formal framework, access and recognition of Indian proceedings will be easier in the jurisdictions that have already adopted the model law, according to Mital. 

Economy watchers are quite hopeful that the insolvency law amendment Bill will get introduced in the second leg of the Budget session, which begins on March 14.

FDI inflows

India received $64 billion in FDI inflows in 2020 higher than the 2019 levels. The inflows were largely driven by increase in mergers and acquisitions. Cross-border deals surged 83 per cent to $27 billion with major deals involving ICT, health, infrastructure and energy sectors. 

This evidenced rise in cross-border cases and inherent risks calls for enactment of a formal comprehensive cross-border insolvency framework, according to the IBBI chairman. 

Currently, the provisions of IBC provides for cross-border insolvency cases through bilateral agreements and issuance of letters of request to foreign courts by Adjudicating Authorities under Sections 234 and Sections 235.

The insolvency laws committee (ILC) felt that this process is an ad-hoc framework that is susceptible to delays and uncertainty for creditors, debtors and courts.

The ILC therefore suggested the adoption of UNCITRAL model law with necessary modifications to suit the Indian context. The Model law has been adopted by 50 countries so far covering 54 jurisdictions.

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