The Indian government is considering changes to its bankruptcy laws to address concerns over delays in insolvency proceedings and low recovery rates. The move aims to make the process faster and more efficient, benefiting both lenders and investors.
Why the Changes Are Needed
India’s insolvency process has been criticized for taking too long, leading to reduced asset values and lower recoveries for lenders. The Insolvency and Bankruptcy Board of India (IBBI) is working on new proposals to improve the system. The public consultation on these proposals is set to end on Tuesday, though authorities may extend the deadline.
Currently, bankruptcy cases often take years to resolve, discouraging global investors from lending in India. Although the government had revamped bankruptcy laws nearly a decade ago, setting a resolution deadline of 330 days, many cases still go beyond this limit.
Challenges in the Insolvency Process
Industry experts say the long delays in resolving insolvency cases are a major concern. According to Hari Hara Mishra, CEO of the Association of ARCs in India, “The time overruns in insolvency cases followed by the decline in recovery outcomes have been a cause of concern for all stakeholders.”
Official data highlights the problem. In the nine months leading up to December, it took an average of 821 days for courts to approve a resolution plan. This is 35% longer than the previous financial year. At the same time, the recovery rate for creditors has declined. In the financial year ending March 2024, investors recovered only 28% of their money, compared to 46% in 2018-2019, according to the Reserve Bank of India.
Key Proposals for Reform
The government’s proposed changes aim to improve efficiency in several ways:
- Faster Resolution for Complex Cases – Courts may be allowed to handle the insolvency of interconnected businesses through joint hearings instead of dealing with each company separately.
- Minimizing Creditor Disputes – New measures would ensure creditor disputes do not delay a company’s progress toward a resolution plan.
- Boosting Interim Financing – The reforms encourage more funding during insolvency proceedings. Lenders providing interim finance would have greater involvement in creditor meetings.
Impact on Bad Loan Managers and Investors
These reforms could benefit India’s asset reconstruction companies (ARCs), which specialize in managing bad loans. If interim financiers gain more influence in the corporate insolvency process, private credit funds may also find more investment opportunities in special situations.
Puneet Jain, Chief Investment Officer at Neo Asset Management, believes these changes will be positive. “Interim financiers help retain asset value in an insolvency case,” he said. “If they gain more clout in the corporate insolvency process, it will pave the way for private credit funds to do more business in special situations.”
Conclusion
The proposed changes in India’s bankruptcy laws aim to speed up case resolutions, improve asset recoveries, and attract more global investors. By making the insolvency process more efficient, the government hopes to boost confidence in India’s financial system and provide better outcomes for creditors. The final details of the reforms will be clear once the public consultation process is complete.
