Global Acquisitions and Overseas Funding by Indian Corporates Raises Insolvency Regime Issues

27 May 2008: Fitch Ratings today commented that it views positively the legal reforms and self-help remedies introduced under various Indian laws, such as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, which have been put in place to eradicate criticisms traditionally levelled against the country's insolvency regime.

However, the agency notes that the insolvency regime still suffers from issues such as lengthy processes, as well as the lack of a comprehensive and unified bankruptcy code so as to minimise uncertainty relating to recovery outcomes. Fitch notes that although steps were initiated in 2002 to amend the Companies Act and unify the bankruptcy code by setting up a proposed National Company Law Tribunal, those provisions have yet to be enacted.

"Research indicates that the general bias of Indian insolvency legislation had been in favour of the debtor, rather than the creditors. Despite the traditionally strong emphasis on the taking of security, the timeliness and ease of enforcement has remained uncertain," said Rakesh Valecha, senior director in Fitch's Asia-Pacific Corporate Ratings Group, in the fourth of a series of special reports on insolvency regimes in Asia-Pacific published today.

"Increasing cross-border acquisition activities by Indian corporates and the use of international debt financing for such transactions have propelled insolvency issues into the limelight. Concerns such as the enforceability of security in the various jurisdictions, limits on cross-border guarantees and funds transfer, as well as the robustness of the transaction financing structures have thus become more pertinent, and are crucial in determining recovery value and assigning ratings," he added.

Entitled "India's Insolvency Regime and its Impact on Recovery Ratings", the report first focuses on describing India's insolvency regime and the various avenues through which secured and unsecured creditors can enforce their claims. It then discusses Fitch's methodology in terms of assigning instrument ratings to debt obligations issued by Indian corporates. The cases which are cited focus particularly on cross-border acquisition scenarios, i.e. on how Issuer Default Ratings (IDRs) are assigned to both the Indian acquirer and the foreign subsidiary acquired, and how instrument ratings are assigned to debt obligations issued by both entities.

(This is press release of Fitch Ratings )

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