India’s infrastructure capacity has struggled to keep pace with its rapid urbanisation. Municipalities, tasked with building and maintaining urban infrastructure, face several challenges, including dwindling revenues, high administrative costs, a deteriorating credit profile, borrowing restrictions, and conditions attached to central government grants.
A potential solution to enable municipalities to raise funds for infrastructure development is the introduction of a municipal insolvency framework. Such legislation would need to align with the Constitution of India, which governs municipalities under Part IXA.
In an article published on the NUALS Law Journal, Mr Devendra Mehta explores the structure of a municipal insolvency law, addressing key aspects such as the entities to be included within the definition of “municipality,” the appropriate courts for filing insolvency cases, and the appointment of an administrator to oversee the process. It also draws on unique practices that have evolved under Indian corporate insolvency law to incorporate in the proposed framework. Importantly, the paper distinguishes between the insolvency of a municipality itself and the insolvency of an entity in which a municipality holds an interest, outlining different pathways for their resolution. Additionally, the paper argues that municipal insolvency legislation could indirectly enhance the efficiency of corporate insolvency law in specific cases.
From an Indian perspective, the paper considers several resolution mechanisms. These include:
- Expanding public-private partnerships (PPPs);
- Adjusting municipal boundaries to improve administrative efficiency, either by expanding or curtailing areas as needed;
- Collaborating with other government authorities to maximise the use of available land parcels;
- Assigning land parcels to creditors in lieu of cash, where feasible.
The paper concludes by highlighting the broader benefits of a municipal insolvency law. With India’s favourable demographic profile and urbanisation challenges, a well-defined legal framework can foster transparency, mitigate risks, reduce borrowing costs, and attract a wider pool of capital. It can also help balance public interest with creditor rights, providing a predictable and fair process for debt restructuring. By addressing these issues, such a framework would empower municipalities to raise the funds needed to fulfil their obligations to citizens and support the country’s urban development goals.
The full paper can be accessed [here] (from page 46 of the NUALS Law Journal). For a more detailed summary, please follow this [here].