Insolvency Across Borders: India

In today’s global market, conducting business in countries where operating costs are low can be an attractive enterprise. The Republic of India, which has a bustling market full of large companies, is high on the research list for many credit professionals.

India’s economy is growing and a new Insolvency and Bankruptcy code, which was passed in the spring of 2016, is meant to streamline credit processes. Still, there are issues credit managers might consider when evaluating counterparties from India. In this installment of the insolvency regulations series, we’ll look at what the new Insolvency and Bankruptcy Code entails and what financial issues credit managers need to watch for in the second-most populous country in the world.

Learn more about the nearly 4000 Indian companies on our radar, a quarter of which are in the high risk red zone.

India’s new Insolvency and Bankruptcy Code, Streamline the Process

In the past, this Asian country had several bankruptcy provisions, but none of them were applied universally. In fact, according to Nicholas Stern’s article, “Insolvency Rules Abroad,” India’s previous insolvency and bankruptcy regulations were so convoluted that the World Bank ranked the country 136 out of 190 countries in their guide for ease of doing business.

The new code enforces that all insolvency and bankruptcy cases must be resolved within a 270-day period. Under the new set of rules, businesses filing insolvency or bankruptcy in India must bring their cases to the country’s National Company Law Tribunal. Once a case is accepted, according to Stern, who cites The Economic Times, plaintiffs appoint insolvency professionals. These professionals must then be approved by the tribunal, and, at that point, the 270-day time limit to come to an agreement commences.

There have been a few growing pains with the new law, yet that's to be expected with any newly implemented procedure, according to Stern. India’s courts suffer from “low bankruptcy judge productivity” as well as a backlog of nearly 25,000 cases the tribunal might be responsible for resolving in 2017. Additionally, finding qualified judges is an issue in India.

In essence, India is moving down the right path by focusing on a simplified bankruptcy process. However, until the kinks are worked out of the new system, credit managers should remain vigilant in their efforts to avoid companies posing a bankruptcy risk.

India’s Bank Issues, Overall Risk and Invoicing System Still Pose a Threat to Portfolios

Though many large companies are prospering in India, banks in the country are having a hard time lending funds because of asset quality issues, according to Stern. He cites a Fitch Ratings report, which states: “Just 50 Indian companies account for about 30 percent of banks’ stressed assets.”

When assessing Indian companies to add to their portfolios, credit managers will want to take extra care, as the country’s overall risk has increased by 336 percent since the Great Recession. Each industry also has its own level of risk, which credit managers will want to consider when gauging enterprise health.

Additional issues include bad or slow payers due to an intricate, often puzzling invoicing system. To avoid payment complications, credit managers will want to circumvent the system, coming up with inventive terms that will cut down on the time-consuming invoicing process in India. As an example, Stern cites Guiseppe Trunzo, CICP, Finance Manager with SoftwareOne AG in Stans, Switzerland. Trunzo’s company uses “ insurance to insure its receivables, as well as postdated checks that are effective in India, where a dishonored check can bring a prison sentence,” wrote Stern. In the end, educated flexibility might be the best way to approach the country, with a strong bias toward financially conservative measures.

Bottom line: India still spells risk if a credit manager isn’t properly informed. However, it is no match to the risk that other Asian countries – like China – pose, for instance. Though China has had robust insolvency regulations in place for a number of years, follow through lacks, which makes India’s 270-day resolution limit attractive by comparison.

Preparation is key to maintaining a healthy portfolio when doing business in India. Monitoring the financial health of Indian companies, as well as any timely news information could make the difference between success or having to deal with insolvency.

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