New IBC rules to cover financial service providers
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, a...
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.