Page 33 - Banking Finance August 2024

ARTICLE

Why India needs a Group Insolvency submitted its report around the same time as the
MLEGI (Model Law) was adopted by UNCITRAL. Hence,
Framework? the guidance of the model law could not be
Corporate group structure is a prevalent mode of business incorporated in the recommendation of the working
ownership in India. Many Indian businesses operate in group. Therefore, the ministry of Corporate Affairs
groups. As per the OECD-SEBI study titled "Company-Groups- entrusted the committee (CBIRC) under the
In-India 2022";"On average Indian listed companies have chairmanship of Dr K.P. Krishnan to review the
more than tripled the number of subsidiaries in last 15 years recommendation of MLEGI and provide
and as of March 2020, listed companies in the NIFTY 50 recommendations for implementation of Group
index have an average number of approximately 50 Insolvency framework in India. Accordingly, CBIRC
subsidiaries/step down subsidiaries". Complex group submitted its report in December 2021(Report of
structures result in opacity of transactions and inter group CBIRC-II on Group Insolvency) along with its
dealings. Related party transactions are also widely recommendations and a draft framework for Group
prevalent. Insolvency in India.

There lies a possibility of the misuse of related party Likely Group Insolvency Framework in
transactions for the purpose of diverting funds from one
group entity to the other entity of the group. Moreover, India
in a group structure setting, there may be instances where Basis the recommendations of the CBIRC-II report, the
the credit secured by an entity may be channelized to other government is expected to introduce the Group Insolvency
group members for some temporary accommodation or Framework in phases. The likely key features, as gathered
other business imperatives. This level of interconnectedness from the recommendations of the CBIRC are as below:
poses serious challenges during the insolvency process. In a) Voluntary, Flexible and Enabling - The group insolvency
absence of defined group solvency mechanism, the group framework to be introduced is likely to be voluntary,
entities are dealt with in isolation by the insolvency courts. flexible and enabling in nature. It is expected to strike
In such a scenario, there are high chances that the creditors a fine balance between the separate legal personality
are unable to realize the full value from the insolvent entity. concept (of solvent group entities) and value
maximization from insolvent entities of the group.
Marching towards Group Insolvency
b) Broad Definition of Group - The definition of "Group"
Framework in India -Work In Progress is likely to be broad so as to cover a large number of
The need for the Group Insolvency framework has been well corporate debtors within the scope of the framework.
recognized by the regulators and the government. The "Control" (in terms of section 2 of Companies Act, 2013)
government as well as the Insolvency and Bankruptcy board and "Significant Ownership" (as defined under Section
of India (IBBI), on their part, has already taken initiatives 5 of Competition Act 2002) may be used for defining
for the development of a structured framework in this the concept of Group.
regard. The work done by the various committees/study c) Applicability - The Group Insolvency framework may be
groups are mentioned below: made applicable only to corporate debtors against
a) Working Group on Group Insolvency (2019) - IBBI whom insolvency proceeding or liquidation process is
constituted a working group under the chairmanship of going on. Other members of the group who are solvent
Mr. U.K.Sinha. The working group submitted its report may be kept outside the ambit of the framework.
titled "Report of the Working Group on Group However, solvent members of a group may voluntarily
Insolvency" on 23rd September 2019. It contained
join the group proceedings if they deem fit.
comprehensive recommendations for creation of an
enabling environment for phase wise implementation d) Approach - Provisions regarding "Substantive
of Group insolvency in India. Consolidation" are not likely to be part of the proposed
Group Insolvency framework in the initial phase. The
b) Cross Border Insolvency Rules/Regulations framework is likely to deal primarily on "Procedural
Committee (CBIRC-II) - The IBBI Working group Coordination" approach in the initial phase.

30 | 2024 | AUGUST | BANKING FINANCE