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)
· Enacted in 2016 due to rising Non-Performing Assets (NPAs) and debt defaults. · IBC shifted from ‘Debtor-in-Possession’ to ‘Creditor-in-Control.’ · Aims to revive financially stressed companies as going concerns, preserving jobs and maximizing value for creditors. · Aims to maximize asset realization and distribute proceeds to creditors to satisfy outstanding debts. · 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.
