When India revamped its bankruptcy code in 2016, some foreign investors were hopeful it would rewrite the rules of capitalism in the country.

The big US distressed debt specialist Oaktree Capital was among those that saw opportunities to invest in the country following the attempt to turn one of the slowest insolvency regimes of any large economy into one of the fastest.

But Oaktree has been frustrated in its attempt to strike its first headline acquisition, losing out in an auction of a shadow lender that has drawn criticism over just how effective the new code will be. The regime had promised to deal swiftly with failing companies, removing the owners and blocking them from trying to buy back the businesses out of bankruptcy.

A key test came in late 2019 when India’s central bank took over Dewan Housing Finance (DHFL), one of the country’s largest providers of funding to property developers. The Reserve Bank of India cited concerns about the lender’s governance and ability to pay its debts of about $14bn.

The code had not been designed to handle financial companies. But in 2019, Indian regulators had allowed the future of financial services companies to be resolved under the code on a case-by-case basis in an attempt to contain the fallout from the collapse of big infrastructure lender IL&FS.

That failure sent shockwaves through the Indian financial system. DHFL's stock, like other non-banking financial companies, took a beating. The company also became mired in allegations of kickbacks although its promoters have denied any wrongdoing.

Oaktree was one of a number of a foreign investors that looked at DHFL when the auction started in January 2020. The process took more than a year, in part because of delays as a result of the pandemic but also because of numerous bidding rounds.

Oaktree was up against Indian conglomerates Piramal Group and Adani Group, and Hong Kong-based credit investment group SC Lowy. In November, a bid by Adani Group prompted rivals to cry foul, claiming it was submitted after the deadline. A person close to the Adani Group has said all rules and regulations were followed. But SC Lowy subsequently dropped out. A total of five rounds took place before a company controlled by Indian tycoon Ajay Piramal emerged victorious in January.

Oaktree maintains its bid was superior but that it was overlooked in favour of domestic buyers. It has vowed to challenge the decision in court. Mr Piramal has said his offer was the strongest, telling the Financial Times that the bidding was about following the rules and “achieving the best bid for the asset”. He added: “This is not about Indian versus foreign.”

Yet some analysts watching the bidding have said the shifting rules, such as the acceptance of bids after a deadline, have raised doubts about the process.

“For one thing, it’s taken too long,” said Deepak Shenoy, founder of Capitalmind, a portfolio management company in Bangalore, about the DHFL resolution. “When things fester in the financial industry things go bad. It’s [like] trying to auction vegetables: after some time there aren’t too many good vegetables to sell.”

Some experts say DHFL’s case has underlined how ill-equipped the code is to deal with the resolution of financial companies. Separate legislation was planned for these companies but was withdrawn after a backlash, leaving gaps.

“It does raise questions for the long term sustainability of the code,” said Debanshu Mukherjee, co-founder of the Vidhi Centre for Legal Policy.

At stake is India’s capacity to recover from the shock of the pandemic. The Reserve Bank of India expects the share of banking assets that are non-performing to shoot up to as high as 14.8 per cent under extreme scenarios. An inefficient system will only impair growth.

Legal experts say a separate insolvency law planned for these financial companies could have offered better protection to retail deposit holders. Under the current resolution plan, people holding more than Rs200,000 ($2,740) of fixed deposits and non-convertible debentures in Oaktree are set to take heavy losses. Some depositors are going to court to recover money in a fight that could hinder the process.

Overhauling India’s bankruptcy code was never going to be easy. Using the code for financial services companies on an ad hoc basis may complicate matters. “This can’t be the permanent solution,” said Mr Mukherjee.