ALSO READAnirudh Burman & Rajeswari Sengupta: Clear the air before enforcing Bankruptcy Code Pratik Datta & Rajeswari Sengupta: RBI should not regulate asset reconstruction companies Insolvency law changes were delayed for 56 yrs: Bhupender Yadav Value of assets to decide fees of professionals Draft law for financial firm's insolvency suggests setting up of Resolution Corp
The Insolvency and Bankruptcy Code (IBC), 2016 creates a new institutional framework for the quick and equitable resolution of distressed firms and individuals. A critical pillar of this law is the creation of a new profession of insolvency professionals (IPs). The IPs will be regulated by the code set out by Insolvency and Bankruptcy Board of India (IBBI) as well as by the insolvency professional agencies (IPAs). The IBC sets out the broad framework for regulating IPs and delegates the task of framing detailed subordinated legislation governing their functioning to the IBBI. In an earlier column, we had highlighted some radical new provisions related to IPs in IBC. These provisions could potentially pave the way for the subsequent regulations to be bold and more receptive to global talent. This spirit is, unfortunately, missing in the draft Insolvency and Bankruptcy (Registration of Insolvency Professionals) Regulations, 2016 that the Ministry of Corporate Affairs (MCA) has published for public consultations.
The IBC defines a “person” in an expansive manner and includes persons resident outside India. This explicitly created the opportunity for the regulator to issue regulations permitting a foreign resident to register as an IP in India. Clause 11 of the draft regulations, however, explicitly makes a person resident outside India ineligible to register as an IP. A similar restriction has been applied to the registration of IPAs. Clause 3 of the draft regulations on Registration of Insolvency Professional Agencies says, “no person resident outside India shall at any time, have or acquire control over the applicant, or own more than 49 per cent of the share capital of the applicant.”
Countries such as the United Kingdom and Canada have a well-developed cadre of self-regulated IPs. While Canada does not have IPAs, the UK has had them for almost three decades. Over time, this structure of IPs and IPAs has witnessed better self-regulation, including the development of well-defined codes of ethics and business practices, along with better methods of monitoring the performance of member IPs by IPAs. A lot of these learnings can be assimilated into the Indian system if professionals from such countries are allowed to service Indian debtors and creditors.
State intervention through regulation is justified when there is a market failure. In the field of insolvency profession, potential sources of market failure include risks to consumer protection and concentration of market power. None of these risks is aggravated by having non-residents register as IPs in India or allowing more than 49 per cent foreign ownership of IPAs. In other words, from a risk-based perspective, it is not clear what risk is sought to be mitigated by not permitting non-residents to be IPs. Under the draft regulations, all IPs will have to clear a qualifying exam and become members of IPAs. This will weed out unskilled or unethical persons regardless of whether they are residents of India or not. The regulations could be designed such that any non-resident IP would be subject to the same standards of supervision, monitoring and disciplinary action in India as a resident IP.
An important objective of the regulator is to facilitate the development of the insolvency profession in India. The IBBI needs to ensure that adequate safeguard measures are built into the regulations to foster competition among the IPAs and prevent consumer protection related problems. There is no plausible nexus between the discrimination against foreign IPs and the objectives of the regulator, especially when the IBC allows for it. No rationale accompanying the draft regulations has been provided either to explain if this is a national security consideration, though it seems highly unlikely in this case. In the absence of any explanatory note or comment published by the MCA, it is fair to argue that these proposals be reconsidered.
Moreover, while the definition of a person under the IBC includes different kinds of natural and artificial legal entities such as Limited Liability Partnerships (LLPs) and trusts, the draft regulations permit only individuals and partnership firms to register as IPs. Again it is not clear why some legal forms are prohibited while others are allowed. While some legal forms may be difficult to regulate as IPs (for example, trusts and societies), it is unclear why LLPs are not permitted to apply when they are basically partnerships with limited liability.
The issues highlighted above will have a significant impact on the nature and development of the IPs in India over the next several years. In the insolvency and bankruptcy processes envisaged by IBC, the courts have been entrusted with a largely administrative role, while the IPs will actually mediate in reaching a resolution. Given the critical role to be played by this new profession, once the IBC is notified and becomes functional, it is of utmost importance that there be clarity on the regulatory structure for the IPs. It would be a good idea to jump-start this profession by encouraging the adoption of best practices and principles from jurisdictions that have effective bankruptcy regimes and one way of doing this would be to permit non-residents to practice as IPs in India.
Rajeswari Sengupta is a researcher at IGIDR and Anirudh Burman is a researcher at NIPFP. Both were members of the research secretariat of the Bankruptcy Law Reforms Committee. Published with permission from Ideas For India (www.ideasforindia.in), an economics and policy portal