Ease of Doing Business a major step forward – Indian Insolvency and Bankruptcy Code 2016

The unprecedented 30-place jump made by India in the World Bank’s Ease of Doing Business (EODB) rankings, from 130 to 100, is an encouraging step in the right direction for businesses in India.

This, combined with Moody’s raising of its global rating for India to Baa2, is compelling evidence of positive changes taking place within India’s business operating environment.

There is no doubt that there are tremendous opportunities for UK businesses of all sizes and complexions in India, both now and into the foreseeable future.

India is fast adopting sustainable new attitudes to international business co-operation and the public ‘re-positioning’ of India, coupled with targeted structural reforms and policies, have made India a beneficiary of a deluge of FDI flows.

As foreign companies seek to benefit from the upward trajectory of the economy and from India’s attractiveness as a manufacturing hub, FDI flows are showing a 37% year-on-year increase to US$ 10.4bn in the first quarter of 2017, following a total FDI amount of US$ 60.1bn in 2016-17.

More than any other country, UK businesses are taking advantage of the investment opportunities in India. The UK is the largest G20 FDI investor in India, with around US$ 24bn invested in the country since 2000.

These numbers do not even take into account Foreign Institutional Investment (FII) flows from the UK into the Indian stock markets or direct investments from UK private equity and venture capital. Nor does it include disaggregated trade and investment flows.

And this is not merely a one-way relationship. The UK and its economy benefits considerably from India. UK companies engaged in India garner increased exposure and earnings and generate direct benefits such as enhanced reverse innovation and technology flows and increased exports. They also improve the competitiveness of the wider UK corporate sector.

The India UK story remains strong and committed, and Prime Minister Modi’s visit the UK on the 18th of April, will further help to fortify the UK – India collaborative relationship.
However certain operational challenges remain. The World Bank cited improvements in 2016-17 in areas such as, time taken to start a business, streamlining access to building permits, contract enforcement, and most importantly insolvency resolution.

We feel this will set a precedent for things to be.

UKIBC conducts annual Ease of Doing business survey for its members and the as per our most recent survey, the main barrier to doing business in India was ‘legal and regulatory impediments’ and (63%) of our respondents felt so, down from 67% as observed the year before.

The prevailing view among those that have not yet seen improvements is that the Government is doing the right things and, in time, improvements would become more evident, Pace of Reforms however remains a key ask.

With an aim to develop Strategic Engagement with India – we are keen to actively contribute towards issues resolution by presenting an impactful solution based on knowledge exchange and best practice share model. The ‘Insolvency code’ is a classic example of collaboration between India and UK for a collaborative successful future.

The Indian Insolvency and Bankruptcy Code 2016 introduces a completely new insolvency and resolution regime for India. A major step towards improving Ease of Doing Business and to stimulate the growth of the Indian capital markets.

The most important aspect of the Code can be said to be a timely resolution and timely liquidation. The Code provides for time-bound procedures for preparation and implementation of a resolution plan, liquidation process, fast track corporate insolvency resolution process, and voluntary liquidation. Provisions in the code seek to incentivise preservation of the value of the corporate debtor, which is a significant departure from the old system. ‘Financial creditors’ have primacy in the code, and they have been recognised as a category different from ‘operational creditors’.

This is of great value to UK businesses and we support this aspect of the code.

The Code was drafted under the aegis of the Bankruptcy Law Reforms Committee (BRLC), which engaged extensively with a variety of stakeholders before publishing its final report on bankruptcy law reforms.

During this stakeholder consultation process, the Reforms committee also had the benefit of suggestions from experts in the United Kingdom and was also supported by the British High Commission, the City of London, and the India-UK Financial Partnership chaired by Mr Uday Kotak and Sir Gerry Grimstone.

This is Strategic Engagement based on Technical Knowledge Share and UK India Business Council is keen to support such engagements to ensure further and continued engagement with various stakeholders as the Indian Insolvency and Bankruptcy Code continues to evolve.

A key observation of some of our members is that while the code is very promising, issues around cross border insolvency need more clarity, even as the Bankruptcy Law Reforms Committee, in its interim and final report, has repeatedly highlighted the need for an efficient system to deal with issues of cross-border insolvencies.

This is an important aspect of the code and is critical in dealing with several situations faced in the insolvency process, for example where a corporate debtor has assets offshore, where an offshore entity has assets in India and defaults in some manner, as well as in cases of cross-border group insolvencies.

Hence 4 key aspects which need to be looked at specifically in more detail are:

• Enforceability of the Code’s provisions offshore:
• Cross-border creditors
• Indian assets of a foreign company:
• Cross-border group insolvencies:

It is important to mention at this point that the Code currently specifies that the central government may enter into an agreement with the government of any country for enforcing the provisions of the Code.

Following such agreement, the Central Government can direct the application of the Code’s provisions in relation to assets or property of the corporate debtor situated in such country.

So far, there has been no such reciprocal arrangement arrived at by India with any country. However, in view of the fact that India is a common law nation whose laws bear significant similarities with those of UK, it would be appropriate and increasingly critical for India to consider entering into reciprocal arrangements with the UK.

Yet another challenge, perceived by our members is in getting the Indian Bankruptcy Code off the ground for which we would need to develop robust institutional framework and a strong cadre of insolvency professionals required to implement the new law.

With strong macroeconomic indicators and business-friendly leadership at the centre, India has an opportunity to entrench high levels of growth and transform the country into a manufacturing hub to match its world-class services output.

The steps taken by the government to improve India’s business environment have, according to our members, delivered steady improvement and created optimism for more. Improving the ease of doing business is critically important to achieving this and Indian Bankruptcy Code 2016 is a wonderful and much needed step in the said direction.
It is a progressive piece of legislation that is intended to improve the efficiency of insolvency and bankruptcy proceedings in India, a key asks of our members.

We are hopeful that this exciting chapter of legal and regulatory change will facilitate the deepening of the Indian loan and capital markets and stimulate greater interest internationally from credit suppliers.

However, we do realise that the Code is at its nascent stage, it will take time to cross various practical and logistical hurdles before becoming fully comprehensive and consistent.

Here’s a thought: The UK insolvency regulations have been amended many times since their implementation in 1980s through a massive stakeholder consultation process. This flexibility of the system and the use of external advice drawn from the people most embedded in the system worked to provide a coherent and maturing set of rules in the UK and can be the way that India adopts as well.

We at the UK India Business Council are keen to support this consultative approach and progressive legislation in the best way possible.