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Group Insolvency Mechanism


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.
About Insolvency and Bankruptcy Code (IBC)

路聽聽聽聽聽聽 Enacted in 2016 due to rising Non-Performing Assets (NPAs) and debt defaults.

路聽聽聽聽聽聽 IBC shifted from ‘Debtor-in-Possession’ to ‘Creditor-in-Control.’

路聽聽聽聽聽聽 Aims to revive financially stressed companies as going concerns, preserving jobs and maximizing value for creditors.

路聽聽聽聽聽聽 Aims to maximize asset realization and distribute proceeds to creditors to satisfy outstanding debts.

路聽聽聽聽聽聽 Financial creditors, operational creditors, and corporate debtors can trigger the Corporate Insolvency Resolution Process (CIRP).

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.

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