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Group Insolvency Mechanism |

Group Insolvency Mechanism

Context

∙ Reserve Bank of India Governor Shaktikanta Das recently pushed for a specified framework for the group insolvency mechanism.

Group insolvency mechanism

∙ Group insolvency mechanism is a legal framework designed to handle insolvency scenarios where multiple companies within a corporate group are financially distressed.

∙ This framework addresses the complex interdependencies between these companies, preventing cascading failures and ensuring a more comprehensive and efficient resolution process.

∙ Many developed countries, including the UK, US, and Japan, have implemented or are developing group insolvency frameworks.

∙ The UNCITRAL Model Law on Cross-Border Insolvency provides recommendations for countries to consider Group insolvency mechanisms when designing their own frameworks.

Need

∙ In the absence of a specified framework, the group insolvency mechanism has been evolving under the guidance of the courts in India.

∙ Also, current insolvency frameworks often treat each company within a group as a separate entity. This can be problematic when companies within a group are financially interconnected, with debts and assets shared across subsidiaries.

Benefits

∙ Increased creditor recoveries: A coordinated approach can maximize asset realization and improve creditor returns compared to separate proceedings for each company.

∙ Preservation of viable businesses: The framework can help identify and rescue healthy companies within the group, preventing unnecessary job losses and economic disruption.

∙ Enhanced overall economic stability: By preventing domino effects and resolving group insolvencies efficiently, the framework can contribute to a more stable business environment.

Challenges

∙ Complexity: The possible challenges in adopting the group framework are: intermingling of assets, devising a definition of a ‘group’ and addressing cross-border aspects.

∙ Absence of market for stressed assets: On stressed assets, one major impediment for implementing a successful resolution plan has been the absence of a vibrant market for stressed assets in the country. This effectively limits the pool of prospective resolution applicants for stressed assets under IBC.

∙ Potential abuse: Safeguards are needed to prevent companies from misusing the framework to their advantage or to shield assets from creditors.

∙ Enforcement: Effective enforcement mechanisms are crucial for ensuring compliance with the framework and achieving desired outcomes.

Way Ahead

∙ A robust secondary market in loans can be an important mechanism for management of credit exposures by the lending institutions.

∙ Any amendments to the Code with emphasis on a financial creditor-led resolution framework, in an overarching manner is the need of hour.

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