India and Singapore relax over stressed assets

The Insolvency and Bankruptcy Code, 2016 (code) provides for the comprehensive rules-based resolution of insolvent corporate debtors, and has become a significant and successful means of stressed asset resolution. The success of the code reinvigorated the distressed debt market and generated interest from international investors, with increased participation in secondary trading in distressed assets and as resolution applicants. Singapore investors have become major investors in the stressed asset sector through strong bilateral ties and investment-linked relationships. As of the end of September 2021, Singapore was the second top investing country in India, accounting for 22% of foreign direct investment. Upcoming developments will further promote and strengthen the existing India-Singapore business corridor in the stressed asset sector.

With globalisation and increased international trade and investment, business failures may transcend national boundaries. This causes cross-border legal issues. One of the most successful frameworks to resolve these issues is the Model Law on Cross-Border Insolvency (model law) introduced in 1997 by the United Nations Commission on International Trade Law. Singapore adopted the model law through the Singapore Companies Act (Amendment) Act 2017, which allows foreign representatives to apply to the high court for recognition of foreign proceedings without the need for reciprocity.

First, India is near to introducing a cross-border insolvency resolution framework, but at present the code provides only an enabling framework for cross border insolvency. This is based on reciprocal arrangements with foreign countries or through letters of request, case-by-case. In the absence of comprehensive cross-border insolvency provisions, courts have resolved problems in individual cases, such as Jet Airways (India) Limited v State Bank of India and Anr in case the which domestic and foreign insolvency practitioners agreed a co-operation protocol embodying principles of modified universalism. In 2018, the Insolvency Law Committee submitted its report recommending the adoption of the model law as modified in areas such as reciprocity and public policy. In November 2021, a draft of proposed cross border insolvency rules and regulations was released and public comments were invited.

Under a future cross-border insolvency resolution framework, the Singapore-India business corridor will be stronger, enabling cross-border creditors to recover debts and promoting co-operation in stressed asset resolution. Recognising debt restructuring undertaken in the other country will provide creditors and debtors with innovative distressed debt tools. Chinese and other Asian companies are already restructuring their debts through the Singapore regime.

Second, proximity and strong commercial and cultural links give Singapore an edge in investment. The Avoidance of Double Taxation Agreement between Singapore and India offers a strategic advantage to investors by preventing the double taxation of income and reducing tax burdens.

Third, the government is finalising a bad bank regime and has established the National Asset Reconstruction Company Ltd. (NARCL) and the India Debt Resolution Company to aggregate and manage non-performing loans. This will give investors an opportunity to invest in security receipts issued by NARCL against INR2 trillion (USD26.98 billion) of stressed assets, backed by government guarantees of INR306 billion (USD4.12 billion).

In another significant development, the Reserve Bank of India (RBI) issued two sets of directions revamping the rules for the sales and assignments of loans and securitisation. The changes should create a robust secondary market in stressed loans. The Securities and Exchange Board of India (SEBI) amended the SEBI (Alternative Investment Funds) Regulations, 2012 and introduced a sub-category of special situation funds within category I of alternative investment funds for investments in stressed assets only including stressed loans available for acquisition.

Such developments will create a more efficient market for distressed assets. They will provide opportunities for investors in Singapore to take part in the stressed debt market. They will cement further the bilateral relationship and fuel the economic growth of both countries.

Dhananjay Kumar is a partner and Surbhi Pareek is a principal associate at Cyril Amarchand Mangaldas