Lack of provisions in the country’s bankruptcy laws to deal with cross-border insolvency may force Western investment companies hit by global credit crunch to sell off their assets in the country at throwaway prices instead of being able to sell their worldwide assets in one go to obtain a better price.
Since Indian courts do not recognize decisions of insolvency courts in other countries, bankrupt foreign investment companies would be forced to scurry for a domestic buyer before their local assets get into never-ending insolvency proceedings here.
Industry sources said such troubled foreign investors who have massive holdings in many of the upcoming real estate and shopping mall projects in the country will not be able to realize the value of their assets by selling them in one block. Investors would prefer finding a buyer quickly for the Indian asset even at a loss rather than letting it lose its value further in lengthy litigation. Once local lenders or material suppliers take legal steps for recovering dues, it could take even decades for a resolution.
Sumant Batra, leading bankruptcy expert and vice-president of global association of insolvency professionals Insol International said,”In the absence of a cross-border insolvency law in the country, many investors in the US or the UK who have invested in India through special purpose vehicles in tax-friendly countries like Mauritius may not be able to sell their assets in India in a manner where both the Indian as well as foreign lenders and other stake holders get satisfactory resolution”. Mr Batra added that having a cross-border bankruptcy law will be extremely beneficial for domestic companies too as they are increasingly buying assets abroad.
Buyers are willing to pay a higher price in a market if they get cheaper asset in another market. Selling individual assets to different parties significantly reduces the chances for the sinking holding company to exit the business at a decent price and redeploy the proceeds in new businesses. Many overseas funds that have invested in Indian companies are owned by holding companies in the US and the UK, and are in deep financial trouble. More and more such companies are expected to put their Indian business on the block.
It is crucial for the funds to sell their local assets quickly as the fund flow to the entity executing the projects in India keep drying up and chances of defaulting on payments due to lenders or material suppliers here are high. Once this happens, the local lender or material supplier could take recourse to recovering the money by invoking the Securitization & Reconstruction of Financial Assets and Enforcement of Security Interest Act, under which they could take recovery proceedings within 60 days of issuing a notice to the company. They could also move the Company Law Board.
