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    New IBC rules to cover financial service providers

    Synopsis

    The corporate affairs ministry has notified the Insolvency and Bankruptcy Rules, 2019. It will provide a generic framework for insolvency and liquidation proceedings of systemically important Financial Service Providers (FSPs) other than banks, an official statement said.

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    The move also comes against the backdrop of instances of various FSPs facing problems.
    New Delhi: The government has put out detailed rules for the resolution of systemically important financial service providers under the bankruptcy law, opening the doors for resolution of stressed non-banking finance companies under this framework.

    Financial service providers are ordinarily not covered under the Insolvency and Bankruptcy Code. Under the rules notified, the code can be invoked to find a resolution for stressed finance companies such as Dewan Housing Finance Corporation Ltd. (DHFL). These rules will not apply to banks.

    Separately, the government will notify specific categories of financial service providers that do not fall under the systemically important category to be resolved as ordinarily applicable to corporate debtors.

    “The government will notify specific categories of FSPs that do not fall under the systemically important category and shall be resolved under the normal provisions of the Code as ordinarily applicable to corporate debtors,” it said in a release, adding that the special framework will not apply to banks.

    This will be decided in consultation with the appropriate regulators, which, in most cases, would be the Reserve Bank of India.

    The rules were issued under Section 227 of the IBC, which allows the Central government to notify FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings.

    Corporate affairs secretary Injeti Srinivas said the special framework is essentially aimed at serving as an interim mechanism to deal with any exigency pending the introduction of a fullfledged enactment to deal with the resolution of banks and other systematically important financial service providers.

    The government will introduce the Financial Resolution and Deposit Insurance Bill in parliament in the winter session.

    Under the framework, the Corporate Insolvency Resolution Process will be initiated only on the application of the appropriate regulator. The National Company Law Tribunal will appoint an administrator proposed by the regulator for financial service providers admitted into insolvency proceedings and will take on the management of the company, accept or reject claims of creditors and handle liquidation proceedings.

    Under the framework, approval of any resolution plan will also require the administrator to seek ‘no objection’ from the regulator regarding the persons who will take over the management of the FSP.

    The regulator shall issue ‘no objection’ on the basis of the fit and proper criteria applicable to the financial service provider.

    Experts said the framework will likely bring more interest in the resolution of distressed NBFCs such as DHFL. “A housing finance company like DHFL which is stressed and not getting resolved may be admitted for insolvency resolution. This framework will allow external buyers to enter,” said Manoj Kumar, a partner at law firm Corporate Professionals, adding that the framework will provide potential players interested in acquiring DHFL assets immunity from potential liabilities arising from investigations by government agencies.
    (Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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    3 Comments on this Story

    Ramam Rajolu272 days ago
    Now a days GOI MF and RBI are coming out with many RULLES AND REGULATIONS to protect the depositors of NBFCs. It is commendable. One important thing is most of the depositors are retired elderly people. The process should be quickened or else many go to heavenly abode.
    Hudaf Shaikh273 days ago
    IBC has proven to be far less effective as compared to DRT in maximizing recovery from stressed firms.
    Further, RBI has proven singularly incapable in its role as a banking regulator - and is too overstretched in doing it''s core job of ensuring liquidity to enable all sectors of the economy to operate effective.
    Hence, the Government should first ask RBI to demonstrate it''s ability by asking it to complete the resolution of IL&FS within 6 months before taking any other FSP for resolution
    Kochar Bipin273 days ago
    In light of the Supreme Court judgement highlighting the primacy of secured first charge creditors in any resolution process, the rules should require that these FSPs are restricted from making any payment on all securitizations and asset sales done within past 3 years until it is clearly established that these were perfected by obtaining a No Objection Certificate from all creditors having a charge on those assets.
    The Economic Times