Global Economy

View: IFSC can act as a stepping stone for insolvency reforms

International Finance Service Centre (IFSC) at Gujarat International Finance Tec (Gift) City, a Special Economic Zone (SEZ), was conceptualised to create an offshore jurisdiction in India. The plan was to capture some of the business that was being carried out in Singapore, Mauritius, Dubai, Hongkong, London and similar centres of global finance.

A host of incentives have been provided in the last five years; waiver of security and commodity transaction tax, regulatory and tax benefits to alternative investment funds, tax neutral relocation of funds, exemption on long term capital gains, tax holiday for aircraft leasing, tax exemption for aircraft operators, relaxation in Companies Act norms for foreign companies etc.

In addition, announcements were made for setting up fintech hub and bullion exchange. A unified regulator called the International Financial Services Centre Authority (IFSCA) has been established.

However, IFSC does not have an insolvency code befitting the stature of a global finance hub. A Resolution Framework for Financial Institutions (RFFIs) and cross-border protocol is essential to compete with other jurisdictions; aspects which are missing in the Insolvency and Bankruptcy Code, 2016 (IBC).

An attempt was made to create a robust RFFIs by introduction of The Financial Resolution and Deposit Insurance Bill, 2017; however, this was scrapped amidst protests. Currently, we have an enabling provision in the IBC i.e., Section 227, and a plethora of rules to support the RFFIs. A rule-heavy approach may be prone to challenges on the grounds of authority that can be derived from a delegated legislation; an aspect of law discussed in detail in the recent judgement of Hon’ble Supreme Court in Lalit Kumar Jain vs. Union of India.

Vis-à-vis, cross border protocol, IBC has bare-bones provisions in sections 234 and 235. The report of Insolvency Law Committee on adoption of UNCITRAL Model Law on Cross Border Insolvency was submitted to Ministry of Finance and Corporate affairs in 2018; however, in the quinquennial year of IBC, the legislature has still not decided on its adoption.

We are not privy to the logic of the legislature to delay incorporation of RFFIs and cross border protocol into IBC. Nevertheless, a template exists in other jurisdictions, which allows us to have our cake and eat it too. Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) have adopted cross border legislation based on UNCITRAL Model Law on Cross Border Insolvency whereas United Arab Emirates has not adopted the Model Law; in-effect different laws for off-shore and on-shore. Moreover, the orders of courts of DIFC and ADGM can be enforced in courts of mainland Dubai and Abu Dhabi and vice-versa.

Shenzhen SEZ in China provides us with another example. As far back as 1986, Shenzhen SEZ had enacted a bankruptcy law which was different from the Mainland Chinese bankruptcy law. In a similar vein, recently on a pilot program basis, the courts in Mainland China entered into an agreement with courts in Hong Kong Special Administrative Region for cross-border mutual recognition, assistance, and cooperation in relation to corporate insolvency and restructuring matters.

Another aspect where IFSC and IBC will intersect is the Cape Town Protocol on Aircraft Equipment (CTP). CTP creates a registration mechanism that reduces risks of creditors and specifies remedies in case of bankruptcy. The budget for the year 2021-22 had incentivized aircraft leasing companies to set-up a base in IFSC. A pre-requisite for persuading foreign lessors to move to IFSC would be the availability of an implementing legislation of CTP. Ministry of Civil Aviation, in October 2018, had put up the draft of CTP for public comments; however, a legislation on the same has not seen the light of the day.

The Central Government has powers to modify provisions or enactments in relation to SEZ under The Special Economic Zones Act 2005. Enacting legislations of cross-border insolvency, resolution of financial institutions, and Cape Town Protocol will not only make IFSC attractive to foreign investors but also will act as a bridge for incorporating these laws into The Insolvency and Bankruptcy Code. Also, if a reciprocal recognition and enforcement mechanism between IFSC and on-shore IBC is established, it will expand the current boundaries of IBC.

Finally, the timing may be opportune. The current Chairman of IFSCA, in his earlier role in Ministry of Corporate Affairs along with Insolvency and Bankruptcy Board of India, were instrumental in making IBC the success it is today.

The author is an Insolvency Professional & Restructuring Advisor.


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