Why is it in the news?

• RBI Governor Shaktikanta Das has advocated the establishment of a specific framework for the group insolvency mechanism to address challenges in the financial sector.

About Group Insolvency Mechanism

• A legal framework designed to manage insolvency situations involving multiple companies within a corporate group.
• Addresses the intricate interdependencies among these companies to prevent cascading failures during the resolution process.
• Implemented or in development in developed countries such as the UK, US, and Japan.
• UNCITRAL Model Law provides recommendations for countries to consider when designing their own group insolvency frameworks.

Need for a Specified Framework

• The mechanism has been evolving under the guidance of Indian courts with the absence of a specified framework.
• Current insolvency frameworks treat each company within a group as a separate entity, leading to difficulties when companies are financially interconnected.
• A coordinated approach can maximize asset realization, improving creditor returns compared to separate proceedings for each company.
• Identifies and rescues healthy companies within the group, preventing unnecessary job losses and economic disruption.
• By preventing domino effects and resolving group insolvencies efficiently, the framework contributes to a more stable business environment.

Challenges

• Challenges include addressing the intermingling of assets, devising a clear definition of a ‘group,’ and managing cross-border aspects.
• The absence of a vibrant market for stressed assets in India limits the pool of prospective resolution applicants.
• Safeguards are necessary to prevent companies from misusing the framework to their advantage or shielding assets from creditors.
• Effective enforcement mechanisms are crucial for ensuring compliance with the framework and achieving desired outcomes.

Way Forward

• Amendments to the Code should prioritize a financial creditor-led resolution framework in an overarching manner.
• Developing a robust secondary market in loans is crucial for effective credit exposure management by lending institutions.