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New bankruptcy laws for financial services providers

New Delhi: The Ministry of Corporate Affairs (MCA) on Friday notified the rules for resolution of systemically important financial services providers (FSPs) under the bankruptcy law.

The new rules will ensure that problems in systematically important NBFCs such as Dewan Housing Finance Corporation (DHFL), IL&FS Financial Services, and India Bulls does not create trouble for the entire sector.

The rules provide a generic framework for insolvency and liquidation proceedings of systemically important FSPs other than banks.

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. This will be decided in consultation with appropriate regulators that, in most cases, would the Reserve Bank of India (RBI).

Section 227 of the Insolvency and Bankruptcy Code, 2016 enables the Central government to notify FSPs or categories of FSPs for the purpose of insolvency and liquidation proceedings. The special framework under the said section, however, shall not apply to banks.

“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,” said Corporate Affairs Secretary Injeti Srinivas.

The insolvency process for the FSPs will be different for other corporate debtors. The corporate insolvency resolution process (CIRP) of an FSP will be initiated only on an application by the appropriate regulator and individual investors or depositors would not be able to take an entity to the National Company Law Tribunal (NCLT).

The regulators in the case of FSPs will also appoint the individual for the initiation of CIRP, as the administrator who will play the same role as being played by insolvency resolution professional (IRP) in case of other cases. Under the terms of resolution for FSPs, an interim moratorium will commence on and from the date of filing of the application for initiation of CIRP by the appropriate regulator till its admission or rejection by the Adjudicating Authority.

The provisions of interim-moratorium or moratorium shall 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.

The Administrator shall take control and custody of third-party assets or properties in custody or possession of the FSP and deal with them in the manner, to be notified by the Central government under section 227.

On the positive side, under the new rules, the license or registration which authorises the FSP to engage in the business of providing financial services shall not be suspended or cancelled during the interim-moratorium and the CIRP.

Upon approval of the resolution plan by the Committee of Creditors, the Administrator will seek ‘no objection’ from the appropriate regulator to the effect that it has no objection to the persons, who would be in control or management of FSP after approval of the resolution plan.

The FSP will also need to obtain prior permission of the appropriate regulator for initiating voluntary liquidation proceedings. The Adjudicating Authority shall provide the appropriate regulator an opportunity of being heard before passing an order for liquidation or dissolution of the FSP.

DHFL may be one of the first cases to test the notified rules under Section 227 of IBC. Sources indicated that the current resolution of DHFL under banks inter-creditor agreement is unlikely to bear any results and creditors may be forced to refer it to once rules are in place.

DHFL is one of the largest HFCs that ran into trouble last year soon after the collapse of IL&FS. Banks have an exposure of Rs 46,000 crore in DHFL.

The government is also looking at notifying inclusion of NBFCs under the IBC as its earlier plan to deal with the issues under the proposed Financial Resolution and Deposit Insurance (FRDI) Bill fell flat. The government withdrew the FRDI Bill as it caused caused a lot of furore among the general public. The bill contained a ‘bail-in’ clause for resolution of bank failure which was perceived to be against the interest of the depositors.

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