Information Utility under IBC, 2016: Revolutionizing Credit Information Infrastructure

Introduction

The Indian credit recovery infrastructure has undergone a remarkable transformation since its inception, evolving from cumbersome judicial processes to modern technological solutions. Initially, debt recovery mechanisms relied solely on traditional civil procedures under the Code of Civil Procedure, which proved lengthy and inefficient. The system involved two distinct phases: debt adjudication leading to a judgment or decree, followed by execution proceedings under Order 21 of the CPC for actual recovery, until the introduction of the Information Utility under IBC improved data reliability and speed.

The landscape began to change with the enactment of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [1], which established Debt Recovery Tribunals (DRTs) as specialized forums for expedited adjudication and recovery of debts owed to banks and financial institutions. These tribunals possessed the authority to issue Recovery Certificates certifying amounts payable by debtors after summary adjudication processes. Despite providing for 180-day disposal timelines, practical implementation showed significant delays, with over 70,000 cases involving more than five lakh crore rupees pending in DRTs as of April 2016.

The introduction of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) further revolutionized the recovery process by empowering banks and financial institutions to recover non-performing assets through various mechanisms, including taking possession and selling securities without approaching courts or tribunals. However, these legislative frameworks still faced challenges in ascertaining accurate debt amounts and resolving disputes efficiently.

The Insolvency and Bankruptcy Code, 2016 [2] represented a paradigm shift by introducing the concept of Information Utility under IBC as a foundational pillar of the insolvency resolution ecosystem. This innovative approach aimed to address fundamental information asymmetries that plagued traditional debt recovery mechanisms by creating specialized repositories for financial information.

Understanding Information Utilities

Information Utility under IBC represent a revolutionary concept in the Indian financial ecosystem, functioning as specialized entities that serve as repositories of financial data. These organizations are designed to receive, authenticate, store, and disseminate financial information concerning debtors to facilitate time-bound insolvency resolution processes. The IUs maintain extensive data networks containing crucial information such as borrowings, defaults, security interests, and other financial details of borrowers. According to Section 3(21) of the IBC, “Information Utility means a person registered with the Board under section 210” [2]. This definition establishes the regulatory framework under which these entities operate. Section 209 of the IBC further stipulates that eligibility to conduct business as an Information Utility requires obtaining a certificate of registration from the Insolvency and Bankruptcy Board of India (IBBI) [2].

The fundamental purpose of Information Utilities extends beyond mere data storage. These entities function as independent third-party repositories that can provide reliable evidence of debt and default, thereby reducing litigation arising from disputes over claimed amounts. The Bankruptcy Law Reforms Committee envisioned Information Utilities as part of a competitive industry that would maintain arrays of information about corporations continuously, enabling undisputed and complete information to become available to all participants in insolvency resolution processes within minimal timeframes.

Legal Framework and Regulatory Structure

The establishment and functioning of Information Utilities operate under a robust regulatory framework orchestrated by the IBBI. Section 196 of the IBC empowers the IBBI with comprehensive authority to “grant, renew, withdraw, suspend or cancel registration of information utilities” [2]. This provision further authorizes the IBBI to formulate regulations governing registration and related matters.

Exercising these powers, the IBBI notified the Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017 [3], which provide detailed guidelines for registration and operation of Information Utilities. These regulations establish specific eligibility criteria, operational requirements, and governance structures that ensure the reliability and integrity of Information Utilities.

Registration Requirements and Process

The regulatory framework establishes stringent criteria for entities seeking to operate as Information Utilities. According to Regulation 3 of the IU Regulations, registration applications may be submitted by public companies meeting specific requirements. The applicant must possess a minimum net worth of 50 crore rupees and demonstrate that its sole objective involves providing core services and other services under the IU Regulations while discharging functions essential for service delivery.

Additional requirements encompass compliance with shareholding and governance provisions outlined in Chapter III of the IU Regulations, adherence to bye-laws conforming to Chapter IV specifications, and ensuring that promoters, directors, key managerial personnel, and individuals holding more than 5% of paid-up equity share capital or voting power qualify as fit and proper persons.

The registration process involves submitting applications in Form A of the Schedule to the IU Regulations, accompanied by a non-refundable application fee of 5 lakh rupees. Following due inquiry as prescribed under the regulations, the IBBI issues Certificates of Registration in Form B within sixty days of receiving complete applications, excluding time required for addressing deficiencies or obtaining additional documents.

These certificates remain valid for five years from the date of issuance and may be renewed by submitting renewal applications at least six months before expiry, along with renewal fees of 5 lakh rupees. Information Utilities must also pay annual fees of 50 lakh rupees to the IBBI within fifteen days of each financial year’s commencement, though no annual fees apply during the financial year when registration or renewal is granted.

Shareholding and Governance Framework

The regulatory structure implements specific constraints on shareholding patterns and governance mechanisms to ensure independence and reliability of Information Utilities. Regulation 8 of the IU Regulations establishes that no person may directly or indirectly acquire or hold more than 10% of paid-up equity share capital or total voting power of an Information Utility, whether individually or collectively with persons acting in concert.

However, the framework provides certain exemptions to accommodate public interest and institutional involvement. Shareholding restrictions do not apply to holdings by the Central Government or State Governments. Government companies, stock exchanges, depositories, banks, insurance companies, and public financial institutions may collectively acquire or hold up to 25% of paid-up equity share capital or total voting power.

Special transitional provisions allowed holdings up to 51% of paid-up equity share capital or total voting power for three years from registration date for entities registered before September 30, 2018. Similarly, Indian companies listed on recognized stock exchanges or those without any person holding more than 10% equity could hold up to 100% of Information Utility equity for three years from registration date if registered before September 30, 2018.

Core Functions and Services

Information Utilities perform crucial functions that form the backbone of efficient insolvency resolution processes. Section 213 of the IBC mandates that Information Utilities provide services including core services to any person complying with terms and conditions of the IU Regulations [2].

The IBC defines “core services” under Section 3(9) as encompassing four fundamental activities: accepting electronic submission of financial information, secure and accurate recording of financial information, authenticating and verifying financial information submitted by persons, and providing access to information stored with Information Utilities to specified persons [2].

Financial Information Categories

The scope of financial information handled by Information Utilities encompasses various categories as defined under Section 3(13) of the IBC. These include records of debt of persons, records of liabilities during solvency periods, records of assets over which security interests have been created, records of default instances against any debt, records of balance sheets and cash flow statements, and such other information as may be specified [2].

This extensive scope ensures that Information Utilities maintain databases containing all relevant financial details necessary for informed decision-making during insolvency resolution processes. The availability of such information enables stakeholders to assess financial positions accurately and expeditiously.

Operational Duties and Responsibilities

Section 214 of the IBC elaborates the specific functions Information Utilities must execute to provide core services effectively [2]. Primary duties include accepting financial information in electronic form from persons obligated to submit such information under the IBC and from other persons voluntarily submitting information. This acceptance must conform to forms and manners specified under the IU Regulations.

Authentication of financial information represents another critical function, involving verification of submitted data by all concerned parties. Information Utilities must store authenticated financial information in universally accessible formats, ensuring availability to authorized persons as specified by the IU Regulations.

Information Utilities also bear responsibility for publishing statistical information as prescribed by the IU Regulations and maintaining minimum service quality standards specified by the IBBI. Additionally, they must ensure systems facilitating interoperability with other Information Utilities, promoting seamless information sharing across the ecosystem.

Operational Procedures and Processes of Information Utility under IBC

The functioning of Information Utilities follows detailed procedural frameworks established under the IU Regulations. These procedures govern user registration, information submission, authentication processes, and access mechanisms.

User Registration and Identification

Persons seeking to submit information to or access information from Information Utilities must register themselves with these entities. Upon registration, Information Utilities verify applicant identities and assign unique identifiers, communicating these identifiers to registered users. Importantly, once registered with one Information Utility, persons need not register again with any other Information Utility.

This system promotes efficiency by allowing registered users to submit information to any Information Utility and access information stored with any Information Utility through any registered entity. Different parties to the same transaction may utilize different Information Utilities for submitting or accessing information related to identical transactions.

Information Submission and Authentication

When users submit debt or default information to Information Utilities, these entities assign unique identifiers to the submitted information and provide acknowledgments to users. For default information specifically, Information Utilities must expeditiously undertake authentication and verification processes.

The authentication process involves Information Utilities providing default information to relevant debtors seeking confirmation within specified timeframes. If debtors fail to respond, Information Utilities send three reminders providing three days for response in each instance. Non-response after three reminders results in information being deemed authenticated.

The system employs a color-coding mechanism to indicate authentication status. Confirmed information receives green status, disputed information receives red status, and information deemed authenticated due to non-response receives yellow status. Information Utilities communicate authentication status in physical or electronic form using appropriate color indicators to registered users including lenders of defaulting debtors and parties or sureties to relevant debts.

Data Storage and Access Mechanisms

Information Utilities must store acquired information in facilities located within India, ensuring governance under Indian laws. Access to stored information is granted to specific categories of persons including users who submitted information, all parties to debts and host banks for debt records or asset records or default instances, corporate persons and their auditors for liability records during solvency or financial statements, insolvency professionals, adjudicating authorities, the IBBI, persons authorized under other laws, and other persons consented to by relevant parties.

Integration with Insolvency Resolution Processes

Information Utilities play pivotal roles in facilitating efficient insolvency resolution processes under the IBC. Their integration into various stages of Corporate Insolvency Resolution Process (CIRP) demonstrates their practical importance.

Application Procedures for Financial Creditors

Applications for CIRP by financial creditors under Section 7 of the IBC, read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, must include records of default recorded with Information Utilities or other evidence of default as specified [2]. Form 1 of these Rules lists records of default with Information Utilities among documents constituting appropriate evidence of default.

The NCLT must examine default existence from Information Utility records or other evidence provided by financial creditors within fourteen days of receiving applications. This strict timeline can only be met when ascertainment is possible through Information Utility records, highlighting their critical role in expediting processes.

Operational Creditor Applications

Operational creditor applications under Section 9 of the IBC follow procedures outlined in Rules 5 and 6 of the Application Rules [2]. Upon default occurrence, operational creditors must deliver demand notices of unpaid debts to debtors using Form 3 or provide invoice copies with notices in Form 4.

Debtors may respond within ten days regarding pre-existing disputes on such debts, potentially avoiding IBC proceedings. If payment is not made within ten days of notice delivery, operational creditors may file CIRP applications using Form 5. Both Forms 3 and 5 list records of default with Information Utilities as documents evidencing debt.

Claims Verification and Evidence

During CIRP initiation when Interim Resolution Professionals issue public announcements calling for claims, both financial and operational creditors may submit claims accompanied by sufficient evidence. Information Utility records are accepted as evidence of debt existence, streamlining claims verification processes.

Similarly, corporate applicants and other claimant categories including workmen may utilize Information Utility records as evidence of debt or default. Adjudicating authorities can access and rely upon Information Utility information as proof of default or debt in their proceedings, enabling timely completion of processes under the IBC.

Security and Data Protection Framework

Given the sensitive nature of financial information handled by Information Utilities, robust security and data protection measures are essential. The regulatory framework establishes detailed requirements ensuring information security and preventing unauthorized access.

Custodial Responsibilities

Information Utilities function as custodians of entrusted information rather than possessing ownership rights over stored data. This custodial relationship imposes significant responsibilities for ensuring information protection and security from unauthorized interference and data theft.

The IU Regulations prescribe specific compliance requirements including establishing adequate procedures and facilities protecting information against loss or destruction, adopting secure systems for data flows, storing all information in India-based facilities governed by Indian laws, and refraining from outsourcing core service provision to third-party service providers.

Information Usage and Privacy

Information Utilities are prohibited from utilizing stored information for purposes other than providing services under the Regulations without prior Board approval. They cannot seek customer information except as required for service provision under the IBC. These restrictions ensure that Information Utilities maintain appropriate boundaries regarding information usage and customer privacy.

Adequate arrangements including insurance coverage must be maintained for indemnifying users against losses caused by wrongful acts, negligence, or defaults by Information Utilities, their personnel, or other persons whose services are utilized.

Audit and Risk Management

Information Utilities must appoint external auditors with relevant qualifications to audit information technology frameworks, interfaces, and data processing systems annually. Auditor reports along with Governing Board comments must be submitted to the IBBI within one month of receipt.

Proper risk management frameworks must be established in accordance with Technical Standards, and Preservation Policies must be declared providing details regarding forms, manners, and durations of information maintenance along with transaction details for each user regarding stored information.

Evidentiary Value and Legal Standing

Authenticated information stored by Information Utilities regarding debts or defaults constitutes admissions of such debts and defaults by and among parties to such debts or defaults. This legal standing derives from established principles under the Evidence Act, 1872.

Section 65-B of the Evidence Act provides that information contained in electronic files shall be deemed documents and shall be admissible in courts of law [4]. Section 31 states that admissions are not conclusive evidence of admitted matters but may operate as estoppels under specified provisions. Section 115 of the Evidence Act establishes that when persons have through declarations, acts, or omissions intentionally caused or permitted others to believe facts to be true and act upon such beliefs, neither they nor their representatives shall be allowed to deny the truth of such facts in suits or proceedings between themselves and such persons or their representatives [4].

Judicial Interpretation and Constitutional Validity

The constitutional validity of Information Utility provisions faced scrutiny in Swiss Ribbons Pvt. Ltd. v. Union of India, where the Supreme Court of India examined various IBC provisions [5]. Arguments challenged that Information Utilities not only gather financial information but also verify whether defaults have occurred, essentially certifying debts/defaults without hearings or adjudication procedures.

However, the Supreme Court upheld the constitutional validity of the IBC and clarified that records of default with Information Utilities constitute only prima facie evidence of default, which remains rebuttable by corporate debtors. This judicial interpretation establishes that Information Utility records are not conclusive evidence but provide prima facie proof of default that can be challenged by affected parties.

National E-Governance Services Limited: The Pioneer

The practical implementation of the Information Utility concept began with the registration of National E-Governance Services Limited (NeSL) as India’s first Information Utility. The IBBI registered NeSL on September 25, 2017, marking a significant milestone in the development of India’s insolvency resolution infrastructure [6].

NeSL, a Union Government company established by leading banks and public institutions, operates under the provisions of the IBC and Information Utility Regulations. The registration remains valid for five years from the registration date and demonstrates the practical viability of the Information Utility concept.

The Reserve Bank of India has supported Information Utility development by directing all Scheduled Commercial Banks, Small Finance Banks, Local Area Banks, Non-Banking Financial Companies, and Cooperative Banks to establish appropriate systems and procedures for submitting financial information to Information Utilities [7]. This regulatory support ensures adequate information flow to Information Utilities, enhancing their effectiveness.

Challenges and Future Prospects

Despite the conceptual strength of Information Utilities, practical implementation has faced challenges. Performance metrics indicate that the sole operational Information Utility has achieved limited success, with approximately 600 credit information agreements completed and fewer stakeholders utilizing services as evidenced in various proceedings.

The integration of emerging technologies such as blockchain presents opportunities for enhancing Information Utility performance. Blockchain technology’s cryptographic tools ensuring immutability, data permanence, transparency, and information symmetry could provide foundational systems for Information Utility operations. Various organizations including OECD, IMF, World Bank, and NITI Aayog have recognized blockchain’s potential benefits for such applications, though implementation challenges remain.

Conclusion

Information Utilities represent a transformative approach to addressing information asymmetries in India’s credit and insolvency resolution ecosystem. By providing infrastructure ensuring ready availability of relevant financial information, these entities empower lenders and creditors to make informed decisions while enabling time-bound insolvency resolution processes.

The regulatory framework established under the IBC and supporting regulations creates robust foundations for Information Utility under IBC operations while ensuring appropriate security, governance, and accessibility standards. Integration with insolvency resolution processes demonstrates practical utility in expediting procedures and reducing disputes over debt verification.

While initial implementation has faced challenges, the foundational concept of Information Utility under IBC remains sound. Continued development of Information Utilities, supported by technological advancement and stakeholder participation, promises to strengthen India’s insolvency resolution infrastructure and contribute to more efficient credit markets. The success of this innovative approach depends on sustained commitment from regulatory authorities, financial institutions, and technology providers to realize the full potential of information-rich environments for insolvency resolution.

References

[1] Recovery of Debts Due to Banks and Financial Institutions Act, 1993. 

[2] Insolvency and Bankruptcy Code, 2016. Available at: https://www.indiacode.nic.in/handle/123456789/2154 

[3] Insolvency and Bankruptcy Board of India (Information Utilities) Regulations, 2017. 

[4] Indian Evidence Act, 1872. 

[5] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17. 

[6] National E-Governance Services Limited Registration. Available at: https://nesl.co.in/ 

[7] RBI Circular on Submission of Financial Information to Information Utilities, 2018. Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11189&Mode=0 

[8] SCC Online – Information Utilities under IBC. Available at: https://www.scconline.com/blog/post/2020/10/11/concept-utility-and-working-of-information-utilities-under-the-insolvency-bankruptcy-code-2016/ 

[9] IBBI Service Providers – Information Utilities. Available at: https://www.ibbi.gov.in/service-provider/information-utilities