Overseas funding for global M&As by Indian corporates raises insolvency regime issues

The general bias of Indian insolvency legislation has been in favour of the debtor, rather than the creditors, said ratings agency said Rakesh Valecha, senior director, Asia-Pacific Corporate Ratings Group, Fitch Ratings, in the fourth of a series of special reports on insolvency regimes in Asia-Pacific published today. "Despite the traditionally strong emphasis on the taking of security, the timeliness and ease of enforcement has remained uncertain." 

Despite this, Fitch Ratings said that it viewed positively the legal reforms and self-help remedies introduced under various Indian laws, such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, which have been put in place to eradicate criticisms traditionally levelled against the country's insolvency regime.

However, the ratings agency says that the insolvency regime still suffers from issues such as lengthy processes, as well as the lack of a comprehensive and unified bankruptcy code so as to minimise uncertainty relating to recovery outcomes. It adds that although steps were initiated in 2002 to amend the Companies Act and unify the bankruptcy code by setting up a proposed National Company Law Tribunal, those provisions have yet to be enacted.

Valecha says, "Increasing cross-border acquisition activities by Indian corporates and the use of international debt financing for such transactions have propelled insolvency issues into the limelight. Concerns such as the enforceability of security in the various jurisdictions, limits on cross-border guarantees and funds transfer, as well as the robustness of the transaction financing structures have thus become more pertinent, and are crucial in determining recovery value and assigning ratings."

Titled  India's Insolvency Regime and its Impact on Recovery Ratings, the report first focuses on describing India's insolvency regime and the various avenues through which secured and unsecured creditors can enforce their claims. It then discusses Fitch's methodology in terms of assigning instrument ratings to debt obligations issued by Indian corporates.

The cases which are cited focus particularly on cross-border acquisition scenarios, ie on how Issuer Default Ratings (IDRs) are assigned to both the Indian acquirer and the foreign subsidiary acquired, and how instrument ratings are assigned to debt obligations issued by both entities.

The publication of Fitch's report coincides with an increasing number of Indian corporates carrying out cross-border acquisitions and financing such transactions through the international debt capital markets. This special report is available on the agency's website, and is the fourth of a series of reports that review the insolvency regimes of certain countries in the Asia-Pacific region.