Sound insolvency resolution key to infrastructure growth

Infrastructure developers in India have traditionally placed significant reliance on bank financing for infrastructure development. However, because of aggressive bidding, delayed payments causing strain on cash flows and lack of a secondary market for infrastructure assets, many stressed accounts in the Indian banking system are in the infrastructure sector. As various schemes introduced by the Reserve Bank of India for out-of-court resolution failed to reduce financial strain in the infrastructure sector, the focus has shifted to the Insolvency and Bankruptcy Code, 2016, which is being seen as a panacea for stressed asset resolution. By bridging information asymmetry, prescribing timelines and providing a comprehensive institutional framework for insolvency resolution, the code instils certainty in the process and encourages stakeholders to seek resolution on the basis of “real value” of an asset or a business across various sectors.

However, insolvency resolution under the code cannot be premised on a one-size-fits-all approach, especially in the infrastructure sector. For example, the problems that plague a power generating company are different from those of a company offering telecom services. Matters become further complicated in the case of regulated entities. Any insolvency resolution of such entities will have to conform to the sectoral regulations and guidelines, and different sectoral regulators and concessionaires have a decisive role to play in regulating the affairs and operations of such entity including at the time of transfer of assets and business.

While the code is premised on maximizing the value of assets and balancing of interests of all stakeholders, outlined below are some measures that could help ensure that the stated objectives are achieved.

Divyanshu Pandey and Arpita Garg are partners in the Gurugram office of J. Sagar Associates. Views are personal.