Govt paves way for insolvency resolution of financial service providers

Paving the way for the resolution of debt-laden entities such as Dewan Housing Finance (DHFL), the government on Friday notified the rules for insolvency and liquidation proceedings of financial service providers (FSPs). These rules, notified by the Ministry of Corporate Affairs (MCA), will not be applicable to banks. The government is yet to notify the categories of FSPs to be covered by the notification.

“The special framework provided under Section 227 of the Code for financial service providers is essentially aimed at serving as an interim mechanism to deal with any exigency pending introduction of a full-fledged enactment to deal with financial resolution of banks and other systemically important financial service providers,” Injeti Srinivas, secretary, corporate affairs, said in a press statement.  

While most of the provisions of corporate insolvency will apply to FSPs, there are certain exceptions. For instance, insolvency proceedings will be initiated only on an application by the appropriate regulator, who will be notified by the MCA. Depending upon the FSP, the regulator could be the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) or Insurance Regulatory and Development Authority.

“IL&FS and DHFL crises have pushed the government to bring systemically important financial services companies other than banks into the IBC fold. It is important to note that an eligible bidder under the provisions of Section 29A can still not be approved by the regulator,” Saumil Shah, partner, Dhruv Advisors, said.

The regulator will appoint an administrator and will supervise the entire process. The administrator would have the same duties and powers of an insolvency professional, interim resolution professional, resolution professional or liquidator, as the case may be.

“These rules were much needed. There may be several other NBFCs and other financial service providers which cannot be revived,” said Manoj Kumar, partner, Corporate Professionals.

"They should soon notify the list of FSPs as well so these rules can be put to use.”

Unlike the corporate insolvency process, the moratorium period for FSPs will begin as soon as the application for insolvency is filed by the regulator. The interim moratorium will be in effect till admission or rejection of application by the Adjudicating Authority. These provisions will not apply to any third-party assets or properties in custody or possession of the FSP, including any funds, securities and other assets required to be held in trust for the benefit of third parties, according to the rules.

Experts have also said the subject will need deeper research to understand potential implications for different types of FSPs. “It would be interesting to note how are fixed deposit holders are treated - operational or financial creditors similar to home owners in real estate companies,” Shah added.

The latest notification has also raised questions on the future of the Financial Resolution and Deposit Insurance Bill, the proposed law for ushering insolvency of financial institutions which was withdrawn by the government.