India’s bankruptcy law faces a vital test as creditor banks vote on a winning bid for the first financial company to go through insolvency resolution, a process pitting US distressed-debt fund Oaktree Capital against India’s Piramal Group.

Real estate lender Dewan Housing Finance Corporation, known as DHFL, was the first financial group forced into insolvency in November 2019 after defaulting on about $12bn in debt.

Authorities hope a successful resolution will create a new avenue to clean up India’s fragile financial system, where defaults and governance scandals have forced multiple central bank- and government-led bailouts. “There’s a lot of focus, attention on this process because it’s precedent-setting,” said one person involved.

DHFL’s case is also being seen as a bellwether by foreign investors at a time when India is under pressure to welcome overseas capital, after lengthy tax disputes with Vodafone and Cairn Energy that have tarnished the country’s image.

But bickering between rival bidders accusing each other of rule-bending and unfair practices has prolonged the process. DHFL’s creditors are due to vote on a winning bid on Thursday, but people close to the process say litigation may further delay resolution.

Oaktree, which has $140bn in assets globally, has threatened litigation over what it calls discrimination by the creditors against foreign investors. The fund has alleged its superior bid was being overlooked in favour of Piramal’s because local banks preferred an Indian buyer.

“Foreign investors do not expect to be invited to participate in an auction process, and then be discriminated against on the basis that they are not domestic entities,” Oaktree said in a letter to the creditors last month. “This will unquestionably deter foreign investors from participating in future resolution processes.”

In a response to Oaktree’s allegations, Piramal — a sprawling, family-run conglomerate with interests spanning pharmaceuticals to finance — accused Oaktree of breaching bid process rules, including revising its proposal after a late December deadline. Piramal argued its offer was the strongest.

“This is not about Indian versus foreign,” Ajay Piramal, chairman of Piramal Group, told the Financial Times. “It’s really about following the rules of the bidding process and achieving the best bid for the asset.”

Oaktree declined to comment, but a person close to the fund said it had merely made a clarification after the deadline, not a changed bid.

Creditors are expecting to recover around $5bn through the winning bid.

DHFL was also the subject of controversy in November when bidders accused the powerful Adani Group of making an “unsolicited bid” for the shadow bank after the deadline. Oaktree and Piramal went on to offer higher bids in a subsequent round.

DHFL has become symbolic of the scale of the challenge facing India’s financial system. It flourished as the economy boomed only for its risky bets to sour as growth slowed.

The company also became mired in allegations of wrongdoing under Kapil Wadhawan, its former chairman. He has denied any wrongdoing.

Analysts say a clean resolution of DHFL’s case is necessary to affirm faith in authorities’ ability to revive failed lenders — particularly less-regulated shadow banks — through the landmark bankruptcy code introduced in 2016.

“Being the first case that is going through this process, there’s really no benchmark,” said Ananda Bhoumik, managing director of India Ratings and Research, Fitch’s local unit. Resolution “would help bring [completion] to a large case”.