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From Chairperson’s Desk

Information Utilities: Mitigating Asymmetries

‘‘Often the main problem is that borrowers are more alert of pitfalls of nancial contract since they are better aware
of the risks involved in a project for which nancing is requested. These informational differences are the very

underlying cause of adverse selection or what is already known as the lemons problem….’’

Domantas Skardziukas

Information asymmetry is the situation where one party in a regulated by the Reserve Bank of India. Further, the Securitisation
transaction is better informed in comparison to the other party. and Reconstruction of Financial Assets and Enforcement of
Such situations tilt the balance of power in favour of the party Security Interest Act, 2002 (SARFAESI Act) was amended in 2016
having the information at the expense of other who goes for to provide for a central database to integrate records of
nancial contract without gauging the market pulse. In situations “property” registered under various registration systems with the
of nancial distress, information asymmetry arises as the central registry. The Insolvency and Bankruptcy Code, 2016 (IBC /
corporate debtor - its shareholders and promoters, are better Code) has experimented with a unique dispensation, unheard in
informed of the asset value than the creditors. Incomplete or other jurisdictions, which provides for Information Utilities (IU) as
missing information delays decision making, exacerbates value a means to address the concern of information asymmetry.
erosion and increases the costs associated with re-organisation of
the rm. It may also lead to sub-optimal decisions regarding In 2015, the Bankruptcy Law Reforms Committee (BLRC) in its
viability of the business or the feasibility of a resolution plan. Value report on rationale and design, laid out the essence of IU and need
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erosion is critical in deciding the revival prospects of the debtor for the same. Post the insolvency ling and before the
and is detrimental to both the debtor and creditor and needs to be commencement of the resolution process, an essential step is to
minimized in order to achieve the objective of value maximization correctly establish the facts on the assets available, who the
through resolution. claimants are, and what contracts are in force. The prime
motivation was to establish an institution in the form of an IU that
Information asymmetry is addressed with incentives to encourage can act as a storehouse of crucial debt and default information.
disclosure of information; to provide for disclosure through The IU was designed as an institution with multiple objectives,
statutory mandate; through use of an ‘information intermediary’ namely:- (i) undisputed information for initiation of insolvency
to gather and share information between stakeholders, and process; (ii) a credit and contract repository; and (iii) repository of
monitoring of disclosure with rewards/penalties associated with authenticated nancial information veried by all parties of the
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performance in this regard. The development of information debt. It was also to function in a private competitive market to
intermediary institutions has been a pre-dominant means, as it avoid creation of a monopoly and minimised the chances of
systematises the addressing of the concern of asymmetry and is market failure by mandating that IUs were to be interoperable. It
able to carry out regular monitoring and adapt to changes in was envisaged that over time, IUs would collectively capture a
market conditions. comprehensive picture of the nancial liabilities of all entities.
BLRC further recommended leveraging technology to build the
The nancial sector evolved institutions of market intermediaries IU. The IBBI registered the rst IU namely, National E-
like nancial analysts, rating agencies etc., alongwith statutory Governance Services Limited (NeSL) on September 25, 2017.
mandates on businesses through listing disclosures and obligations The entity is promoted by State Bank of India, Canara Bank, Bank
to reduce information asymmetry. These measures have enabled of Baroda and others.
better ow of information between creditors and debtors and,
larger market investors, helping reduce the cost of information The IBBI (Information Utilities) Regulations, 2017 (IU Regulations)
asymmetry. There are multiple institutions collecting “nancial enable the IBBI to lay down technical standards, through
information” and “credit information” in the economy, collectively guidelines, for the performance of core services and other
known as the “credit information companies” (CICs) which are services by IUs, based on the recommendations of a Technical

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