India has embarked on a historic reform of the bankruptcy and insolvency process. The Bankruptcy Law Reforms Committee (BLRC) led by Mr T. K. Viswanathan designed a set of processes to resolve insolvency and bankruptcy. The BLRC visualised four pillars of supporting institutional infrastructure to make these processes work efficiently:
1. A private industry of Information Utilities (IUs),
2. A private industry of Insolvency Professionals (IPs) with oversight by private insolvency professional agencies (IPAs),
3. Adjudication infrastructure at the National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT), and
4. A regulator, the Insolvency and Bankruptcy Board of India (IBBI).
These ideas are enshrined in the Insolvency and Bankruptcy Code (IBC), which was enacted by Parliament on 11th May 2016. In order for the law to become effective, the four pillars of institutional infrastructure have to commence functioning. This Working Group is concerned with the first pillar, that of Information Utilities. IUs are a novel concept. While there are many entities all over the world that store information about credit, there are no exact equivalents of IUs. Therefore, while establishing this new kind of entities, it is important to have a clear idea of the services that IUs shall provide, and the processes through which they shall do so. The primary function that IUs perform, that make them important from a public policy point of view, is that they provide high-quality authenticated information about debts and defaults. This document records the draft regulations the Working Group (WG) proposes in order to achieve this purpose, as well as the rationale for those regulations.
While drafting regulations, the WG has been guided by a set of broad principles. One principle has been that courts and tribunals should accept the information in IUs as evidence. For this, once information is submitted to the IU, the IU should authenticate that information with all the concerned parties and only then store it. IUs need to follow restrictions in terms of the kind of information they can accept and the persons whom they can accept or authenticate information from. This ensures that the information in the IU is accurate, and that it cannot be disputed later. Another principle is that of standardisation — the regulator should specify applicable standards and all IUs should conform to those standards. In addition, the WG determined that debtors, creditors, and debts needed to be uniquely identified, and this report suggests how this can be done.
IUs has to perform “core services” as has been defined in the Code. These services constitute the actitivies of IUs that are subject to regulation. Even while performing core services, IUs should have the freedom to innovate business models. For instance, one IU may decide to focus on individuals and another on operational credit. They should have the freedom to do so. Apart from core services, IUs are free to provide other related services. These non-core services are not of regulatory importance, and need not be heavily regulated.
The WG believes that this is a new industry, and will likely innovate in unforeseen ways. Hence, it is important to avoid being overly prescriptive. The objective of the WG was to suggest as few restrictions as are necessary to achieve the public policy purpose of IU.
As mentioned earlier, it is important that any information stored in an IU should be acceptable to courts as prima-facie evidence of the existence of debt. Hence, it is very important to ensure that the process by which information is stored in IUs is very robust, standardised, and rigorous. Hence the WG has described in detail the processes that IUs should follow in handling financial information.
The WG also discussed the market structure. It agrees with the BLRC vision of a dynamic competitive market of private IUs. IUs will have the freedom to set the terms of their contracts, including prices, as long as they conform to regulations. However, it will be necessary to guard against the possibility of price gouging by IUs. Due to the importance of the data that the IUs hold, they need to be subject to several regulatory requirements. A strong risk management framework is necessary, including insurance and provisions for indemnification. Since the financial information with IUs is of regulatory interest, if the regulator judges that the information is in danger of being lost or damanged, it should have to ability to take possession of that information and transfer if to another IU if necessary. Similarly, the regulator should impose reasonable restrictions on outsourcing, balancing the benefits of oursourcing against the increase in risks.
To fix our intuition, this report contains an illustrative set of workflows. During the perusal of the Code, the WG noticed some inconsistencies in it. We document those and suggest appropriate amendments. Lastly, the draft regulations proposed by the WG are appended to the report.