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Why India’s Essar decision could kill the distressed debt market before it starts

The insolvency and bankruptcy code is supposed to do wonderful things for India, but a leftfield decision on creditors this week will have a number of unhelpful side-effects.


Far-reaching: Essar Steel's complex in Hazira, India

An insolvency court decision in India this week could have far-reaching consequences for public-sector bank restructuring, the distressed debt market, and the overall appetite of international funds for Indian credit.

The ruling concerns Essar Steel India, the most high-profile bankruptcy in the country.

The handling of this case is being seen as a litmus test for India’s ambitions to increase the speed of resolution of a host of failed businesses that are dragging down the books of India’s many public-sector lenders.

Essar is being sold to ArcelorMittal, meaning that creditors will get some of their money back.

However, in a ruling that few saw coming, the National Company Law Appellate Tribunal (NCLAT) has decided that secured creditors won’t be treated any differently than unsecured creditors. The holding of collateral apparently won’t make any difference to the way the creditors are reimbursed.

The entire CIR process with respect to the corporate debtor being one of the largest non-performing assets of the country has been put under jeopardy - Consortium of lenders

Whether this is good or bad obviously depends on your position.

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